[Federal Register Volume 79, Number 237 (Wednesday, December 10, 2014)]
[Notices]
[Pages 73354-73359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-28874]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73736; File No. SR-ISE-2014-24]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change To Modify the Opening 
Process

December 4, 2014.
    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 19, 2014, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (the ``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 in order to modify the 
manner in which the Exchange's trading system opens trading at the 
beginning of the day and after trading halts and to codify certain 
existing functionality within the trading system regarding opening and 
reopening of options classes traded on the Exchange. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend ISE rules in 
order to modify the manner in which the Exchange's trading system opens 
trading at the beginning of the day and after trading halts and to 
codify certain existing functionality within the trading system 
regarding opening and reopening of option classes traded on the 
Exchange. Specifically, the Exchange proposes to amend Rule 701 to 
modify the opening process by providing away market protection at the 
open and making system changes to limit instances where an options 
class goes into an imbalance state which prevents the Exchange from 
determining the opening price in a timely manner for that options 
class. The Exchange also

[[Page 73355]]

proposes to amend parts of Rule 701 to more clearly describe the manner 
in which the trading system functions with regards to the rotation 
process for regular orders.
    Currently, for each class of options that has been approved for 
trading, the opening rotation is conducted by the Primary Market Maker 
(``PMM'') appointed to such class of options. The Exchange may direct 
that one or more trading rotations be employed on any business day to 
aid in producing a fair and orderly market. For each rotation so 
employed, except as the Exchange may direct, rotations are conducted in 
the order and manner the PMM determines to be appropriate under the 
circumstances. The PMM has the authority to determine the rotation 
order and manner and may also employ multiple trading rotations 
simultaneously.\3\
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    \3\ See ISE Rule 701(a)(1)-(4). The Exchange proposes to delete 
amend [sic] certain parts of Rule 701 and add language to the 
current rule to describe in greater detail how the PMM initiates the 
rotation process, and in the absence of a PMM, how the trading 
system initiates the rotation process.
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    Trading rotations are employed at the opening of the Exchange each 
business day and during the reopening of the market after a trading 
halt. The opening rotation in each class of options is held promptly 
following the opening of the market for the underlying security.\4\ The 
opening rotation for options contracts in an underlying security is 
delayed until the market for such underlying security has opened unless 
the Exchange determines that the interests of a fair and orderly market 
are best served by opening trading in the options contracts.
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    \4\ The ``market for the underlying security'' is either the 
primary listing market, the primary volume market (defined as the 
market with the most liquidity in that underlying security for the 
previous two calendar months), or the first market to open the 
underlying security, as determined by the Exchange on an issue-by-
issue basis. See ISE Rule 701(b)(2).
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    Currently, the rotation process can be initiated in one of two 
ways. A PMM can initiate the rotation process by either sending a 
rotation request through the trading system or by selecting an auto-
open setting in the trading system for each class in which it serves as 
a PMM.
    Once the security underlying an options class has opened, the 
trading system checks to see whether the PMM assigned to that options 
class has selected to auto-open the options class. If the PMM has not 
selected to auto-open the options class, the trading system waits for 
the PMM to send a rotation request to start the rotation process. The 
PMM can initiate the rotation process by submitting a quote. To 
initiate the rotation process, a PMM quote must be present. If the PMM 
quote is not present, the rotation process for that class will not 
start.
    There may be instances where the PMM is unable to initiate the 
rotation process because, for instance, the PMM is experiencing 
technical difficulties in sending the rotation request to the Exchange, 
or the PMM has not set the auto-open setting or because the PMM has not 
submitted any quotes for an options class. In such instances, the 
Exchange will initiate the rotation process by using the rapid opening 
mechanism within a configurable time period \5\ after the underlying 
security has opened. In order for the Exchange to use the rapid opening 
mechanism in instances where the Primary Market Maker has not initiated 
the rotation process, the following conditions must be met: (i) At 
least one market maker quote must be present; (ii) if there are more 
than one market maker quotes present, the best quoted market maker bid 
must not be greater than a configurable number of ticks than the best 
quoted market maker offer; \6\ (iii) if a class is traded on an another 
exchange, at least one other exchange must have opened that class and a 
NBBO has been published; and (iv) the best quoted market maker bid and 
best quoted market maker offer must not cross the NBBO by a certain 
margin. The margin is calculated as a percentage of the mid-point of 
the NBBO with up to a maximum and a minimum range.\7\ In the event any 
of the conditions described above are not met, the trading system will 
repeat the process after a configurable time period until all the 
conditions are met \8\ thus allowing the Exchange to use the rapid 
opening mechanism to initiate the opening rotation process.
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    \5\ The time period is currently set to five seconds. Members 
are advised when there is a change to this configurable time period 
through the issuance of information circular.
    \6\ The number of ticks is currently set to five. Members are 
advised when there is a change to the number of ticks through the 
issuance of information circular.
    \7\ The margin is currently calculated as 10% of mid-point of 
the NBBO with up to a maximum of $5.00 and a minimum of $0.10.
    \8\ This process is currently repeated every two seconds.
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    After a rotation process has been performed and the option class 
cannot be opened due to an imbalance condition, an imbalance broadcast 
is sent to members. The PMM can then re-initiate the rotation process 
again. If the PMM does not re-initiate the rotation process within a 
configurable time period,\9\ the Exchange will re-initiate the rotation 
process as described above. The rotation process will repeat until the 
class is opened. The Exchange may delay the commencement of the opening 
rotation in any class of options in the interests of a fair and orderly 
market.
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    \9\ The time period is currently set to one second.
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    The trading system currently uses quotes provided by the PMM for 
the series in question to set a range within which to open the options 
series (``Boundary Prices''). The Boundary Prices ensure the opening 
price is close to the reasonable price range for the options class. If 
the PMM for an options class is not present on the bid or the offer for 
that options class then the best quote from the Competitive Market 
Makers (``CMMs'') for that options class is used.
    To determine the opening price, the accumulated quantity for each 
price level is calculated for the buy and sell sides. Only quotes, 
market orders and displayed quantities of limit orders are used to 
calculate the accumulated quantity. The opening price is calculated as 
the price level where a maximum quantity can be traded. If there is no 
overlap between buy and sell prices the opening price cannot be 
calculated and the options class is opened without a trade. If there 
are only market orders on both sides of the quote, an opening price 
cannot be calculated and the options class goes into an imbalance 
state, in which case, the options class does not open until the 
imbalance condition is resolved, as described above. If the calculated 
opening price is outside the Boundary Prices, the options class goes 
into an imbalance state and the options class again does not open until 
the imbalance condition is resolved. If the calculated opening price is 
at or inside the Boundary Prices then that price is the opening price.
    Once the opening price for an options class has been determined, 
order and quotes on the order book in that options class are matched to 
trade in the following order: (1) Market orders trade first, and can 
match with other market orders, quotes and limit orders. As noted 
above, if market orders on either or both sides cannot be traded 
entirely the options class goes into an imbalance state; (2) bid quotes 
and bid limit orders priced higher than the opening price and ask 
quotes and ask limit orders priced lower than the opening price trade 
next; (3) Priority Customer \10\

[[Page 73356]]

orders with a limit price equal to the opening price trade next in time 
priority; and (4) any remaining quantity of quotes and limit orders at 
the opening price trade pro rata. Only the displayed quantity of orders 
and quotes participate in the opening process.
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    \10\ Pursuant to ISE Rules 100(a)(37A) and 100(a)(37B), a 
Priority Customer Order is an order for the account of a person or 
entity that (i) is not a broker or dealer in securities, and (ii) 
does not place more than 390 orders in listed options per day on 
average during a calendar month for its own beneficial account(s).
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    There are a number of issues with the current opening which has 
resulted in fewer pre-open orders being sent to ISE by order flow 
providers. First, while trading through a better away price on the open 
is permitted under the Options Order Protection and Locked/Crossed 
Market Plan (the ``Linkage Plan'') and ISE Rules,\11\ several other 
exchanges provide away market price protection at the opening \12\ 
resulting in order flow being sent to those exchanges and not to ISE 
due to the lack of such price protection on ISE. Second, the opening of 
options series can be delayed by imbalances that prevent ISE from 
determining an opening price in a timely manner. Such delays exacerbate 
the problem of not providing price protection at the opening.
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    \11\ See ISE Rule 1901(b).
    \12\ See NASDAQ OMX PHLX (``PHLX'') Rule 1017(l); Chicago Board 
Options Exchange (``CBOE'') Rule 6.2B, Interpretation .03.
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    The Exchange therefore proposes to modify the opening process by 
providing away market price protection at the opening by including the 
away best bid and offer (``ABBO'') when calculating the Boundary 
Prices. The Exchange also proposes to modify the opening process by 
moving from a single price opening, which will reduce the imbalance 
conditions that the opening process currently faces.
    As is the case today, the PMM or the Exchange will continue to 
initiate a rotation in an options class. Once the PMM or the Exchange 
initiates a rotation, the trading system will automatically process 
quotes and orders in each series. When there is no executable interest 
in a particular series, i.e., there are no quotes or orders that lock 
or cross each other, the trading system will open that series by 
disseminating the Exchange's best bid and offer among quotes and 
orders. Any Public Customer Orders \13\ that would lock or cross a bid 
or offer from another exchange are not included in the Exchange's 
disseminated best bid and offer and are simultaneously processed in 
accordance with Supplementary Material .02 to Rule 1901.\14\ If there 
are any Non-Customer Orders \15\ that would lock or cross a bid or an 
offer from another exchange by more than two ticks, such orders are 
canceled.
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    \13\ Pursuant to ISE Rules 100(a)(38) and 100(a)(39), a Public 
Customer means a person or entity that is not a broker or dealer in 
securities and a Public Customer Order means an order for the 
account of a Public Customer.
    \14\ Under the Options Order Protection and Locked/Crossed 
Market Plan, the Exchange cannot execute orders at a price that is 
inferior to the NBBO, nor can the Exchange place an order on its 
book that would cause the ISE best bid or offer to lock or cross 
another exchange's quote. In compliance with this requirement, Non-
Customer Orders and Public Customer Orders are exposed to all ISE 
Members for up to one second to give them an opportunity to execute 
orders at the NBBO price or better before orders are rejected (in 
the case of Non-Customer Orders) or routed out to other exchanges 
(in the case of Public Customer Orders). See Supplementary Material 
.02 to Rule 1901.
    \15\ Pursuant to ISE Rules 100(a)(27) and (28), a Non-Customer 
means a person or entity that is a broker or dealer in securities 
and a Non-Customer Order means an order for the account of a Non-
Customer.
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    If there are non-customer orders that would lock or cross a bid or 
offer from another exchange by two ticks or less they will be included 
in the Exchange's disseminated best bid and offer. Any quotes that 
would lock or cross a bid or an offer from another exchange, will also 
be included in the Exchange's disseminated best bid and offer.
    The proposed opening process is an iterative process. In the first 
iteration, the trading system attempts to derive the opening price to 
be at or better than the ISE market maker quotes and ABBO prices. When 
there is executable interest, i.e., there are quotes or orders on the 
Exchange that lock or cross each other, the trading system will first 
calculate the Boundary Prices. As is the case today, the trading system 
will use quotes provided by the PMM for the series in question to set 
the Boundary Prices. If the PMM is not present on either side of the 
market then the best quotes from the CMMs are used on the corresponding 
side. ISE Market Maker quotes therefore are the PMM's best bid and 
offer, or in the absence of a PMM quote, best bid and offer of CMMs. If 
there are no PMM or CMM quotes on the bid side, the lowest minimum 
trading increment for the option class is used on the bid side. If 
there are no PMM or CMM quotes on the offer side, the options class 
will not open because in the absence of an offer there is no limit as 
to the price at which an opening trade can occur. If the options class 
is open on another exchange, the Boundary Prices are determined to be 
the higher of the ISE Market Maker's bid in that options class and the 
national best bid, and the lower of the ISE Market Maker's offer in 
that options class and the national best offer.
    Once the trading system has determined the Boundary Prices, it then 
determines the price at which the maximum number of contracts can trade 
at or within the Boundary Prices (the ``execution price''). Once the 
trading system determines the execution price, orders and quotes are 
processed as follows. At the execution price, market orders will be 
given priority before limit orders and quotes, and limit orders and 
quotes will be given priority by price. For limit orders and quotes 
with the same price, priority will be accorded first to Priority 
Customer Orders over Professional Orders \16\ and quotes. Priority 
Customer Orders with the same limit price will be executed in random 
\17\ order while Professional Orders and quotes with the same limit 
price will be executed pro-rata based on size. If the Boundary Prices 
are calculated using the national best bid and/or offer, any remaining 
Public Customer Orders after this iteration that would lock or cross a 
bid or offer from another exchange are processed in accordance with 
Supplementary Material .02 to Rule 1901. Any remaining Non-Customer 
Orders that would lock or cross a bid or offer from another exchange 
may trade outside the Boundary Prices by up to two trading increments 
as further described under the third iteration below.
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    \16\ Pursuant to ISE Rule 100(a)(37C), a Professional Order is 
an order that is for the account of a person or entity that is not a 
Priority Customer.
    \17\ Priority Customer orders with the same limit price in the 
regular order book are currently executed in time priority during 
the opening. The Exchange believes executing these orders on a 
random basis is a fairer approach because the current time priority 
is dependent on when such orders are communicated to the Exchange by 
a Priority Customer's broker before the market, not the time the 
Priority Customer expressed interest in doing the trade. Executing 
these orders in random will provide Priority Customer orders an 
equal opportunity to participate at the open.
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Example 1

    Suppose the following market in option class A:

Away Market BBO: 10 @1.00 x 10 @1.05
ISE PMM Quote: 10 @1.01 x 10 @1.04
ISE CMM Quote: 10 @0.90 x 50 @1.03

    Suppose further the following buy and sell orders in option class 
A:

Priority Customer 1: Buy 10 @1.00
Non-Customer 1: Buy 10 @0.99
Non-Customer 2: Buy 5 @0.95
Priority Customer 2: Sell 50 @0.96
Non-Customer 3: Sell 50 @0.95
Non-Customer 4: Sell 50 @0.95

    In example 1 above, since the ISE PMM quote is better than the away 
market quote, the Boundary Prices are calculated using the ISE PMM 
quote, or 1.01 x 1.04. The highest bid at ISE is 1.01 and lowest offer 
is 0.95. To keep the trade within the Boundary Prices,

[[Page 73357]]

the opening trade would be executed at 1.01 as follows:
     ISE PMM buys 10 contracts
     Non-Customer 3 and Non-Customer 4 sell 5 contracts each 
using the pro-rata allocation method.
    If after the first iteration there remain unexecuted orders and 
quotes that lock or cross each other, the trading system will initiate 
a second iteration. In the second iteration, the trading system uses 
either the ISE market maker quotes or the ABBO prices,\18\ whichever 
was not used in the first iteration. For example, if the ISE market 
maker quotes were used in the first iteration, the second iteration 
will use ABBO prices, and vice versa. If there were no ABBO prices for 
consideration for the first iteration, then this second iteration does 
not occur and the trading system will initiate the third iteration as 
described below. The second iteration only occurs if there are both ISE 
market maker quotes and ABBO prices available in the first iteration to 
determine the opening price.
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    \18\ The ABBO prices considered in the first iteration are also 
used during the second iteration.
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    The trading system then determines the price at which the maximum 
number of contracts can trade at or within the widened Boundary Prices. 
Once the trading system determines the execution price following the 
second iteration, orders and quotes are processed as follows. At the 
execution price following the second iteration, market orders are given 
priority before limit orders and quotes, and limit orders and quotes 
are given priority by price. For limit orders and quotes with the same 
price, priority is accorded first to Priority Customer Orders over 
Professional Orders and quotes. Priority Customer Orders with the same 
limit price are executed in random order while Professional Orders and 
quotes with the same limit price are executed pro-rata based on size. 
If the Boundary Prices in the second iteration are calculated using the 
national best bid and/or offer, any remaining Public Customer Orders 
after this iteration that would lock or cross a bid or offer from 
another exchange are processed in accordance with Supplementary 
Material .02 to Rule 1901. Any remaining Non-Customer Orders that would 
lock or cross a bid or offer from another exchange may trade outside 
the Boundary Prices by up to two trading increments as further 
described under the third iteration below.
    In example 1 above, the following orders and quotes remain on the 
ISE order book following the first iteration:

ISE PMM Quote: 0 @0.00 x 10 @1.04
ISE CMM Quote: 10 @0.90 x 50 @1.03
Priority Customer 1: Buy 10 @1.00
Non-Customer 1: Buy 10 @0.99
Non-Customer 2: Buy 5 @0.95
Priority Customer 2: Sell 50 @0.96
Non-Customer 3: Sell 45 @0.95
Non-Customer 4: Sell 45 @0.95

    Since in the first iteration the Boundary Prices were calculated 
using the ISE PMM Quotes, the second iteration will use away market 
prices that were not used in the first iteration and the Boundary 
Prices are calculated to be 1.00 x 1.05. The highest bid at ISE is now 
1.00 and lowest offer is 0.95. To keep the trade within the Boundary 
Prices, the second opening trade will be executed at 1.00 as follows:
     Priority Customer 1 buys 10 contracts
     Non-Customer 3 and Non-Customer 4 sell 5 contracts each 
using the pro-rata allocation method
     Priority Customer 2 is exposed to all ISE Members to give 
them an opportunity to execute the order at the NBBO price and is 
routed out if not completely executed on ISE.
    If after the second iteration there remain unexecuted orders and 
quotes that lock or cross each other, the trading system will initiate 
a third iteration. In the third iteration, the Boundary Prices, i.e., 
the prices used in the second iteration, and in the case where the 
second iteration does not occur, the prices used in the first 
iteration, are widened by two trading increments. The trading system 
then determines the price at which the maximum number of contracts can 
trade at or within the widened Boundary Prices. Once the trading system 
determines the execution price following the third iteration, orders 
and quotes are processed as follows. At the execution price following 
the third iteration, market orders are given priority before limit 
orders and quotes, and limit orders and quotes are given priority by 
price. For limit orders and quotes with the same price, priority is 
accorded first to Priority Customer Orders over Professional Orders and 
quotes. Priority Customer Orders with the same limit price are executed 
in random order while Professional Orders and quotes with the same 
limit price are executed pro-rata based on size. Thereafter, any 
unexecuted Priority Customer Orders that lock or cross the Boundary 
Prices are handled by the PMM \19\ and any unexecuted Professional 
Orders and Non-Customer Orders that lock or cross the Boundary Prices 
are canceled. While Professional Orders and Non-Customer Orders are 
canceled in these circumstances, the Exchange seeks to provide a higher 
level of service for Priority Customer orders by having them handled by 
the PMM, which has an affirmative obligation to provide liquidity and 
price continuity. The Exchange believes that providing this service for 
Priority Customer orders is appropriate and consistent with feedback 
from members that enter Priority Customer orders on the Exchange, who 
prefer that Priority Customer orders not be canceled in these 
circumstances.
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    \19\ The PMM has the obligation under existing Exchange rules to 
engage in dealings for his own account when, among other things, 
there is a temporary disparity between the supply of and demand for 
a particular options contract, and to act with due diligence in 
handling orders. See ISE Rule 803(c).
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    In example 1 above, the following orders and quotes remain on the 
ISE order book following the second iteration:

ISE PMM Quote: 0 @0.00 x 10 @1.04
ISE CMM Quote: 10 @.90 x 50 @1.03
Non-Customer 1: Buy 10 @0.99
Non-Customer 2: Buy 5 @.95
Non-Customer 3: Sell 40 @.95
Non-Customer 4: Sell 40 @.95

    In the third iteration, the Boundary Prices are widened by two 
trading increments and are calculated to be 0.98 x 1.07 (best bid of 
1.00 widened by two trading increments x best offer of 1.05 widened by 
two trading increments). The highest bid at ISE is now 0.99 and lowest 
offer remains at 0.95. To keep the trade within the Boundary Prices, 
the third opening trade will be executed at 0.98 as follows:
     Non-Customer 1 buys 10 contracts
     Non-Customer 3 and Non-Customer 4 sell 5 contracts each 
using the pro-rata allocation method.
    Since the remaining quantity of Non-Customer 3 and Non-Customer 4 
orders are priced more than two trading increments away from the 
Boundary Prices, these orders are cancelled.
    If after the third iteration there remain unexecuted orders and 
quotes that lock or cross each other, the trading system will initiate 
a fourth and final iteration. In the fourth iteration, the trading 
system does not calculate new Boundary Prices. The trading system will 
simply trade any remaining interest. Thereafter, the trading system 
opens the options series by disseminating the Exchange's best bid and 
offer derived from the remaining orders and quotes.
    Continuing with example 1 above, following the third iteration, the 
following orders and quotes remain on the ISE order book:

ISE PMM Quote: 0 @0.00 x 10 @1.04
ISE CMM Quote: 10 @0.90 x 50 @1.03
Non-Customer 2: Buy 5 @0.95


[[Page 73358]]


    Since there are no marketable orders or quotes left on the ISE 
order book, the trading system opens the class and disseminates the 
Exchange's best bid and offer as 5 @0.95 x 50 @1.03.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Securities Exchange Act of 1934 (the ``Act'') and 
the rules and regulations thereunder that are applicable to a national 
securities exchange, and, in particular with the requirements of 
Section 6(b) of the Act.\20\ Specifically, the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\21\ because 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. The Exchange believes that the proposed opening 
process for options listed on the Exchange will help ensure that ISE 
opens trading in options contracts in a fair and orderly manner and in 
a greater number of options classes. Specifically, the proposed rule 
change will provide away market protection at the opening which the 
Exchange believes will encourage market participants to direct their 
pre-opening order flow to the Exchange and therefore foster greater 
competition at the open for the benefit of all market participants.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed rule change is consistent with 
the Act because it will also facilitate the price formation process by 
taking into account away market prices when calculating the Boundary 
Prices which the Exchange believes will limit instances of an options 
class going into an imbalance state and therefore not opening for 
trading on the Exchange in a timely fashion. Additionally, the proposal 
to move away from a single opening price will permit the Exchange to 
execute a greater number of contracts at the open and therefore remove 
impediments to a free and open market and foster competition at the 
open.
    The proposed rule change to codify the rapid opening mechanism into 
the Exchange's rules will benefit investors and promotes an open market 
by adding detail to the rules regarding how the trading system 
facilitates the opening of option classes on the Exchange.
    The Exchange's proposal to permit the execution of Priority 
Customer orders with the same limit price in the regular order book on 
a random basis is a fairer approach because the current time priority 
is dependent on when such orders are communicated to the Exchange, not 
the time the order originator expressed an interest in doing the trade. 
The Exchange believes that in the interest of promoting just and 
equitable principles of trade, it is appropriate to execute such orders 
on a random basis to ensure that all orders are afforded the same 
opportunity for execution. For example, suppose order 1 originating 
from a retail customer was sent at 11 p.m. to its broker who is a 
member of the Exchange (member 1) and order 2, also originating from a 
retail customer, was sent at 8 a.m. the following day to its broker who 
too is a member of the Exchange (member 2). If member 2 initiates its 
connection to the Exchange before member 1 does and therefore sends its 
retail customer order before member 1 sends its retail customer order, 
member 2's retail customer order will have time priority over member 
1's retail customer order even though member 1's customer had expressed 
an interest in trading earlier than member 2's customer. The Exchange 
believes it is in the public interest to execute these orders in random 
as means to provide them an equal opportunity to participate at the 
open.
    As a participant exchange of the Linkage Plan, the Exchange has 
adopted rules implementing various requirements specified in the 
Linkage Plan. The Linkage Plan provides a set of rules and procedures 
designed to avoid trade-throughs and locked markets. Specifically, 
Section 5(a)--Order Protection--of the Linkage Plan requires that each 
participant exchange establish written policies and procedures that are 
reasonably designed to prevent trade-throughs and to conduct 
surveillance to ascertain the effectiveness of such policies and 
procedures. Section 5(b) provides a number of exceptions to the order 
protection requirements. Section 5(b)(ii), in particular, permits 
trade-throughs to happen during a trading rotation.
    The Exchange notes that each iteration of the proposed iterative 
process complies with Section 5(a) of the Linkage Plan, or qualifies as 
an exception under Section 5(b)(ii) of the Linkage Plan. For the 
purposes of the Linkage Plan, each iteration is a trading rotation to 
determine Boundary Prices at which the most amount of contracts can be 
traded.
    The Exchange represents that the first iteration complies with the 
order protection requirements of the Linkage Plan if it utilizes ISE 
PMM quotes to determine the Boundary Prices because the ISE PMM quotes 
are better than any away market quotes and therefore would not trade-
through better prices at away markets. The first iteration also 
complies with the order protection requirements of the Linkage Plan if 
it utilizes away market quotes to determine the Boundary Prices in that 
any Public Customer orders that remain after this iteration that would 
lock or cross a bid or offer from another exchange would be processed 
in accordance with the requirements of the Linkage Plan, as provided in 
Supplementary Material .02 to Rule 1901.
    If the first iteration utilized ISE PMM quotes then the second 
iteration would utilize away market quotes. If there were no away 
market quotes for consideration for the first iteration then the second 
iteration would not occur. The Exchange represents that the second 
iteration complies with the order protection requirements of the 
Linkage Plan if it utilizes away market quotes to determine the 
Boundary Prices in that any Public Customer orders that remain after 
this iteration that would lock or cross a bid or offer from another 
exchange would be processed in accordance with the requirements of the 
Linkage Plan, as provided in Supplementary Material .02 to Rule 1901. 
If the first iteration utilized the away market quotes then the second 
iteration would utilize ISE PMM quotes. To the extent the second 
iteration results in any trade-throughs, the Exchange represents that 
such trade-throughs are permissible under Section 5(b)(ii) of the 
Linkage Plan, the Trading Rotation exception, which permits a 
participant exchange to trade through a Protected Quotation 
disseminated by an Eligible Exchange during a trading rotation.
    In the third iteration, the Boundary Prices are widened by two 
trading increments to determine the price at which the maximum number 
of contracts can trade at or within the widened Boundary Prices. To the 
extent the third iteration results in any trade-throughs, the Exchange 
represents that such trade-throughs are permissible under Section 
5(b)(ii) of the Linkage Plan. Section 5(b)(ii) of the Linkage Plan, the 
Trading Rotation exception, permits a participant exchange to trade 
through a Protected Quotation disseminated by an Eligible Exchange 
during a trading rotation.
    In the fourth and final iteration, the Boundary Prices are not 
calculated and any remaining interest is traded. To the extent the 
fourth iteration results in any trade-throughs, the Exchange represents 
that such trade-throughs are permissible

[[Page 73359]]

under Section 5(b)(ii) of the Linkage Plan. Section 5(b)(ii) of the 
Linkage Plan, the Trading Rotation exception, permits a participant 
exchange to trade through a Protected Quotation disseminated by an 
Eligible Exchange during a trading rotation.
    The proposed iterative opening process will provide market makers 
and other market participants greater opportunity to participate at the 
open and provide option classes with an increased chance to determine 
an opening price which removes impediments to a free and open market 
and benefits all market participants.

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

    The Exchange does not believe the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act. To the contrary, the Exchange's inability 
to provide away market protection limits competition in that other 
exchanges currently provide such protection and therefore are able to 
attract pre-opening order flow. Thus, approval of the proposed rule 
change will promote intermarket competition because it will allow the 
Exchange to, among other things, provide away market price protection 
at the open and thus, compete with other exchanges for order flow that 
market participants do not currently send to the ISE. The Exchange does 
not believe the proposed rule change will impose any burden on 
intramarket competition. The Exchange believes the proposed rule change 
will encourage ISE Members to send their pre-open order flow to the 
Exchange rather to a competing exchange and will therefore increase 
competition at the open.

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

    Within 45 days of the publication date of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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 Exchange 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-2014-24 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2014-24. 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 the filing also will be available 
for inspection and copying at the principal office of the 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-2014-24 and should be 
submitted by December 31, 2014.

    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. 2014-28874 Filed 12-9-14; 8:45 am]
BILLING CODE 8011-01-P