[Federal Register Volume 80, Number 80 (Monday, April 27, 2015)]
[Notices]
[Pages 23308-23310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-09629]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74771; File No. SR-ISE Gemini-2015-10)


Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending Its 
Information Barrier Rules

April 21, 2015.
    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 April 9, 2015 ISE Gemini, LLC (the ``Exchange'' or the ``ISE 
Gemini'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change, as described in Items I, II, 
and III below, which items have been prepared by the self-regulatory 
organization. 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

    ISE Gemini is proposing to amend its Rules 810 (Limitations on 
Dealings) and 717 (Limitations on Orders). The text of the proposed 
rule change is available on the Exchange's Web site (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 self-regulatory organization 
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 Exchange is proposing to amend its Rules 810 (Limitations on 
Dealings) and 717 (Limitations on Orders) governing information 
barriers. Specifically, the Exchange is proposing to amend the portion 
of the rules that address the limitation on the flow of information 
between a member's Electronic Access Member (``EAM'') unit, which 
handles the customer/agency side of the business, and its affiliated 
Primary Market Maker (``PMM'') and/or Competitive Market Maker 
(``CMM'') (jointly, ``market makers'') unit, which handles the 
proprietary side of the business.
    The International Securities Exchange, LLC (``ISE'') recently 
amended its Rule 810 to allow EAMs to know where and at what price its 
affiliated market makers are either quoting or have orders on the order 
book \3\ and to use that information to influence their routing 
decisions.\4\ As such, an EAM may route an order that it is handling on 
an agency basis to the ISE where its affiliated market maker is either 
quoting or has an order on the order book so that the two orders 
immediately interact. ISE Gemini is now proposing to adopt the same 
change.
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    \3\ According to Rule 805(b)(1)(i) and (ii) market makers may 
only have orders on the order book in option classes to which they 
are not appointed.
    \4\ See Securities Exchange Act Release No. 74521 (March 7, 
2015), 80 FR 15262 (March 23, 2015) (SR-ISE-2014-43).
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    The proposal is designed to be consistent with the protections 
against the misuse of material nonpublic information,\5\ [sic] should 
be able to consider the outstanding quotes of their affiliated marker 
[sic] maker units for the purposes of calculating net positions and 
making routing decisions to increase the member's interaction rate 
between its EAM unit and affiliated market making unit(s). This 
proposal, in tandem with existing ISE Gemini conduct rules,\6\ ISE 
Gemini's review and approval of the information barrier procedures 
submitted by market makers that will be conducting Other Business 
Activities,\7\ ISE Gemini's ongoing surveillances for manipulative 
conduct, and FINRA's exam program that reviews such members [sic] 
compliance with such policies and procedures, should provide a 
regulatory framework that guards customer interests and protects 
against the misuse of material nonpublic information, while increasing 
the operational flexibility of ISE Gemini's members. ISE Gemini notes 
that nothing in this proposed rule change would relieve members of 
their best execution obligation to obtain the most favorable terms 
reasonably available for customer orders. As a national securities 
exchange, ISE Gemini has a comprehensive surveillance program to 
monitor member compliance with applicable rules and regulations, 
including best execution. The Exchange will continue to monitor for 
abnormalities in interaction rates between members, and investigate and 
take appropriate regulatory action against members that fail to comply 
with their best execution obligations.
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    \5\ See, e.g., 15 U.S.C. 78o(g). Section 15(g) of the Securities 
and Exchange Act of 1934 (the ``Act'') requires every broker or 
dealer to ``establish, maintain, and enforce written policies and 
procedures reasonably designed, taking into consideration the nature 
of such broker's or dealer's business, to prevent the misuse. . .of 
material, nonpublic information by such broker or dealer or any 
person associated with such broker or dealer.''
    \6\ See, e.g., ISE Rules 400 (Just and Equitable Principles of 
Trade), 401 (Adherence to Law), 405 (Manipulation), 408 (Prevention 
of the Misuse of Material, Nonpublic Information) and 713 (Priority 
of Quotes and Orders).
    \7\ ISE Rule 810 defines ``Other Business Activities'' as 
meaning, (1) conducting an investment or banking or public 
securities business; (2) making markets in the stocks underlying the 
options in which it makes markets; (3) handling listed options 
orders as agent on behalf of Public Customers or broker-dealers; or 
(4) conducting non-market making proprietary listed options trading 
activities.
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    With this proposed rule change, the EAM unit of a member will only 
have access to orders and quotes that are publicly available to all 
market participants. The proposed rule change will not permit the EAM 
unit of a member to have access to any non-public order or quote 
information of the affiliated market maker, including hidden or 
undisplayed size or price information of such orders and quotes. Market 
makers are not allowed to post hidden or undisplayed orders and quotes 
on the Exchange. Additionally, members do not expect to receive any 
additional order or quote information as a result of this proposed rule 
change.
    ISE Gemini Rule 717(d) and (e) requires members to expose certain 
orders entered on the limit order book for at least one second before 
executing them as principal or against orders that were solicited from 
other broker-dealers. This requirement applies when the EAM is handling 
both sides of a trade and not when an EAM is handling a marketable 
order as agent and is routing that order to execute against a quote/
order resting on the order book. Accordingly, when customer order(s) 
that an EAM is handling as agent

[[Page 23309]]

executes against an affiliated market maker's quote or order, it 
appears as though the EAM was in fact handling both sides of the trade, 
and did not comply with the order exposure requirements of ISE Gemini 
Rule 717(d) and (e). However, because the Exchange does not publicly 
identify the member that entered an order on the limit order book, 
orders from the same firm may inadvertently execute against each other 
as a result of being entered by disparate persons and/or systems at the 
same member firm. Therefore, when enforcing Rule 717(d) and (e), the 
Exchange has never considered the inadvertent interaction of orders 
from the same firm within one second to be a violation of the exposure 
requirement.
    On September 20, 2011 the ISE codified this longstanding policy in 
Supplementary Material .06 to Rule 717,\8\ which specified that members 
can demonstrate that orders were entered without knowledge of a pre-
existing order on the book represented by the same firm by providing 
evidence that effective information barriers between the persons, 
business units and/or systems entering the orders onto the Exchange 
were in existence at the time the orders were entered.\9\ This rule 
requires that such information barriers be fully documented and 
provided to the Exchange upon request.\10\
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    \8\ See Securities Exchange Act Release No. 65361 (September 20, 
2011), 76 FR 59472 (September 26, 2011) (SR-ISE-2011-42).
    \9\ The Exchange conducts routine surveillance to identify 
instances when an order on the limit order book is executed against 
an order entered by the same firm within one second.
    \10\ The Exchange reviews information barrier documentation to 
evaluate whether a member has implemented processes that are 
reasonably designed to prevent the flow of pre-trade order 
information given the particular structure of the member firm. 
Additionally, information barriers are reviewed as part of the 
Exchange's examination program, which is administered by the 
Financial Industry Regulatory Authority (``FINRA'') pursuant to a 
regulatory services agreement.
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    Given the proposed change to ISE Rule 810, the ISE also made a 
corresponding change to Supplementary Material .06 to Rule 717 to 
specify that orders from the same member's EAM unit and its affiliated 
PMM and/or CMM unit may interact within one second without being a 
violation of the order exposure requirement of paragraph [sic] (d) and 
(e) of Rule 717 when the firm can demonstrate that the customer order 
that it routed was marketable, the EAM was not handling the affiliated 
market maker quote/order and the affiliated market maker quote/order 
was in existence at the time the customer order(s) were entered into 
the ISE's system.\11\
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    \11\ See note 4.
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    When the Exchange was drafting the ISE Gemini rulebook, adopting 
.06 of the supplementary material to Rule 717 was inadvertently 
overlooked. Accordingly, the Exchange is now proposing to adopt .06 of 
the supplementary material to ISE Gemini Rule 717 in its entirety, 
which the Exchange is proposing to be identical to .06 of the 
supplementary material as it currently appears in the ISE rulebook.
    The Exchange believes that adopting these rule changes will allow 
for the Exchange to provide its membership with increased operational 
flexibility while keeping intact the original purpose of the rule, 
which was intended to prevent market makers from using customer order 
flow information to influence their quotations. The Exchange believes 
that allowing information to flow from the market maker to the EAM 
would not compromise the integrity of our market, nor would it 
introduce customer harm, as discussed in more detail above. 
Additionally, the Exchange believes that market quality will not be 
eroded due to these changes because the information barrier preventing 
the flow of information from the EAM to its' affiliated market maker 
remains unchanged, meaning, market makers will continue to be unable to 
adjust their quotes either to intercept or avoid orders since that side 
of the barrier remains in force.
    2. Statutory Basis--The basis under the Act for this proposed rule 
change is the requirement under Section 6(b),\12\ in general, and 
Section 6(b)(5) \13\ in particular, that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
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. In particular, the Exchange believes that amending its 
rules to allow information to flow from the market maker to the EAM 
would not compromise the integrity of the market as the information 
barrier preventing the flow of information from the EAM to its 
affiliated market maker remains unchanged. Meaning, a market maker 
cannot be privy to nonpublic information about incoming customer orders 
and adjust their quotations in response. The Exchange also believes 
that this rule change will not introduce customer harm as this change 
does not impact the order protection rules applicable to an EAM 
handling an order as agent,\14\ but rather allows the EAM to route to a 
specific destination to interact with its affiliated market makers' 
quotations or orders in the same manner that the EAM would route orders 
to access quotes and orders of market makers that it is not affiliated 
with. In addition, members will continue to be subject to federal and 
Exchange requirements for preventing the misuse of material nonpublic 
order information.\15\
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ See note 7 [sic].
    \15\ See 15 U.S.C. 78o(g) and ISE Rule 408.
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    Additionally, the Exchange notes that the rule will still require 
that member organizations maintain and enforce policies and procedures 
reasonably designed to ensure compliance with applicable federal 
securities laws and regulations and with Exchange rules. Such written 
policies and procedures will continue to be subject to oversight by the 
Exchange and therefore allowing information to flow from the market 
makers to their affiliated EAMs should not reduce the effectiveness of 
the Exchange rules to protect against the misuse of material nonpublic 
information. Rather the Exchange believes that a member should be able 
to integrate its market makers' positions and quoting information with 
its EAM unit(s) because this proposal, in tandem with existing ISE 
Gemini conduct rules,\16\ ISE Gemini's review and approval of the 
information barrier procedures submitted by market makers that will be 
conducting Other Business Activities, ISE Gemini's ongoing 
surveillances for manipulative conduct, and FINRA's exam program that 
reviews such members compliance with such policies and procedures, 
should provide a regulatory framework that guards customer interests 
and protects against the misuse of material nonpublic information. ISE 
Gemini notes that nothing in this proposed rule change would relieve 
members of their best execution obligation to obtain the most favorable 
terms reasonably available for customer orders. As a national 
securities exchange, ISE Gemini has a comprehensive surveillance 
program to monitor member compliance with applicable rules and 
regulations, including best execution. The Exchange will continue to 
monitor for abnormalities in interaction rates between members, and 
investigate and take appropriate regulatory action against members that 
fail to comply with their best execution obligations. As discussed, the 
proposed changes do not alter a member's best execution duty to

[[Page 23310]]

get the best price for its customer and, therefore, the Exchange does 
not believe that the proposed changes provide any advantage or 
disadvantage to customers or the markets in general.
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    \16\ See note 7 [sic].
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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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. However, the Exchange 
believes that Rule 810 currently imposes a burden on competition for 
the Exchange because it requires market makers that engage in Other 
Business Activities to operate in a manner that the Exchange believes 
is more restrictive than necessary for the protection of investors to 
the public interest. The Exchange believes that the proposed rule 
change is pro-competitive because it is consistent with how other 
national securities exchanges are currently interpreting their rules 
and should provide greater flexibility to allow member firms to make 
routing decisions based on the same information across multiple 
markets.

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 Section 
19(b)(3)(A) \17\ of the Act and Rule 19b-4(f)(6) thereunder \18\ 
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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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 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 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 Gemini-2015-10 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 Gemini-2015-10. 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 will also 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 Gemini-2015-10 and 
should be submitted on or before May 18, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-09629 Filed 4-24-15; 8:45 am]
BILLING CODE 8011-01-P