[Federal Register Volume 81, Number 66 (Wednesday, April 6, 2016)]
[Notices]
[Pages 20021-20024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07833]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77488; File No. SR-ISEGemini-2016-03]


Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing 
of Proposed Rule Change Related to Market Wide Risk Protection

March 31, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on March 17, 2016, the ISE Gemini, LLC (the ``Exchange'' or ``ISE 
Gemini'') 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 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

    The Exchange proposes to introduce new activity based order 
protections as described in more detail below. 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 purpose of the proposed rule change is to introduce new risk 
protections for orders designed to aid members in their risk management 
by supplementing current price

[[Page 20022]]

reasonability checks with activity based order protections.\3\ In 
particular, the Exchange proposes to introduce two activity based risk 
protections that will be mandatory for all members: (1) The ``Order 
Entry Rate Protection,'' which protects members against entering orders 
at a rate that exceeds predefined thresholds,\4\ and (2) the ``Order 
Execution Rate Protection,'' which protects members against executing 
orders at a rate that exceeds their predefined risk settings. Both of 
these risk protections are detailed in Proposed Rule 714(d), ``Market 
Wide Risk Protection.'' \5\ The Exchange will announce the 
implementation date of the Market Wide Risk Protection in a circular to 
be distributed to members prior to implementation.
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    \3\ The Exchange provides members with limit order price 
protections designed to prevent erroneous executions by rejecting 
orders priced too far through the market. See Rule 714(b)(2).
    \4\ The Exchange will determine when to initiate the Order Entry 
Rate Protection pre-open to allow members time to load their orders 
without inadvertently triggering the protection. The precise time 
will be established by the Exchange and communicated to members via 
circular prior to implementation.
    \5\ The term ``Market Wide Risk Protection'' includes both the 
``Order Entry Rate Protection'' and the ``Order Execution Rate 
Protection.''
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    Pursuant to the proposed Market Wide Risk Protection rule, the 
Exchange's trading system (the ``System'') will maintain one or more 
counting programs on behalf of each member that will count the number 
of orders entered, and the number of contracts traded on ISE Gemini or, 
if chosen by the member,\6\ across both ISE Gemini and ISE Gemini's 
affiliate, the International Securities Exchange, LLC (``ISE''), which 
shares a trading system with ISE Gemini. Members can use multiple 
counting programs to separate risk protections for different groups 
established within the member.\7\ The counting programs will maintain 
separate counts, over rolling time periods specified by the member for 
each count, of: (1) The total number of orders entered; and (2) the 
total number of contracts traded.\8\ Contracts executed on the agency 
and contra-side of a two-sided crossing order will be counted 
separately for the Order Execution Rate Protection.
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    \6\ Members will have the option to set different risk 
parameters for their trading activity on each exchange, or set risk 
parameters that apply to their trading across both ISE Gemini and 
ISE, if desired.
    \7\ The Exchange will explain how members can go about setting 
up risk protections for different groups (e.g., business units) in a 
circular issued to members.
    \8\ The member's allowable order rate for the Order Entry Rate 
Protection is comprised of the parameter defined in (1), while the 
allowable contract execution rate for the Order Execution Rate 
Protection is comprised of the parameter defined in (2).
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    Members will have discretion to establish the applicable time 
period for each of the counts maintained under the Market Wide Risk 
Protection, provided that the selected period must be within minimum 
and maximum parameters established by the Exchange and announced via 
circular.\9\ While the Market Wide Risk Protection is mandatory for all 
members, the Exchange is not proposing to establish minimum or maximum 
values for the order entry and execution parameters described in (1) 
and (2) above. The Exchange believes that this approach will give 
members the flexibility needed to appropriately tailor the Market Wide 
Risk Protection to their respective risk management needs. In this 
regard, the Exchange notes that each member is in the best position to 
determine risk settings appropriate for their firm based on the 
member's trading activity and business needs. In the interest of 
maintaining a fair and orderly market, however, the Exchange will 
establish default values for the applicable time period and order entry 
and execution parameters in a circular to be distributed to members. 
Default values established by the Exchange will apply only to members 
that do not submit their own parameters for the Market Wide Risk 
Protection.
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    \9\ The Exchange anticipates that the minimum and maximum values 
for the applicable time period will be initially set at one second 
and a full trading day, respectively.
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    The System will trigger the Market Wide Risk Protection when the 
counting program has determined that the member has either (1) entered 
during the specified time period a number of orders exceeding its 
designated allowable order rate, or (2) executed during the specified 
time period a number of contracts exceeding its designated allowable 
contract execution rate. In particular, after a member enters an order, 
or a member's order is executed, the System will look back over the 
specified time period to determine whether the member has exceeded the 
threshold that it has set for the total number of orders entered or the 
total number of contracts traded, as applicable. If the member's 
threshold has been exceeded, the Market Wide Risk Protection will be 
triggered and the System will automatically reject all subsequent 
incoming orders entered by the member on ISE Gemini or, if applicable, 
across both ISE Gemini and ISE.\10\ In addition, if the member has 
opted in to this functionality, the System will automatically cancel 
all of the member's existing orders. The Market Wide Risk Protection 
will remain engaged until the member manually (e.g., via email) 
notifies the Exchange to enable the acceptance of new orders; however, 
the System will still allow members to interact with existing orders 
entered before the protection was triggered, including sending cancel 
order messages and receiving trade executions for those orders.
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    \10\ Members that set different risk parameters for ISE Gemini 
and ISE will only have their orders rejected on the exchange whose 
threshold was exceeded.
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    The Exchange believes that the proposed Market Wide Risk Protection 
will assist members in better managing their risk when trading on ISE 
Gemini. In particular, the proposed rule change provides functionality 
that allows members to set risk management thresholds for the number of 
orders entered or contracts executed on the Exchange during a specified 
period. This is similar to how other options exchanges have implemented 
activity-based risk management protections,\11\ and the Exchange 
believes this functionality will likewise be beneficial for ISE Gemini 
members.
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    \11\ See Securities Exchange Act Release Nos. 74118 (January 22, 
2015), 80 FR 4605 (January 28, 2015) (Notice); 74496 (March 13, 
2015), 80 FR 14421 (March 19, 2015) (Approval) (SR-MIAX-2015-03).
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    The examples below illustrate how the Market Wide Risk Protection 
would work both for order entry and order execution protections:
    Example 1, Order Entry Rate Protection:
    Broker Dealer 1 (``BD1'') designates an allowable order rate of 499 
orders/1 second.

@0 milliseconds, BD1 enters 200 orders. (Order total: 200 orders)
@450 milliseconds, BD1 enters 250 orders. (Order total: 450 orders)
@950 milliseconds, BD1 enters 50 orders. (Order total: 500 orders)

    Market Wide Risk Protection is triggered on ISE Gemini, and, if 
applicable, ISE \12\ due to exceeding 499 orders in 1 second. All 
subsequent orders are rejected, and if BD1 has opted in to this 
functionality, all existing orders are cancelled. BD1 must contact 
Market Operations to resume trading.
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    \12\ Members that share risk settings across both ISE Gemini and 
ISE will have the Market Wide Risk Protection triggered on both 
markets.
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    Example 2, Order Execution Rate Protection:
    BD1 designates an allowable execution rate of 15,000 contracts/2 
seconds.


[[Page 20023]]


@0 milliseconds, BD1 receives executions for 5,000 contracts. 
(Execution total: 5,000 contracts)
@600 milliseconds, BD1 receives executions for 10,000 contracts. 
(Execution total: 15,000 contracts)
@1550 milliseconds, BD1 receives executions for 2,000 contracts. 
(Execution total: 17,000 contracts)

    Market Wide Risk Protection is triggered on ISE Gemini, and, if 
applicable, ISE \13\ due to exceeding 15,000 contracts in 2 seconds. 
All subsequent orders are rejected, and if BD1 has opted in to this 
functionality, all existing orders are cancelled. BD1 must contact 
Market Operations to resume trading.
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    \13\ Members that share risk settings across both ISE Gemini and 
ISE will have the Market Wide Risk Protection triggered on both 
markets.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of 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.\14\ 
Specifically, the proposed rule change is consistent with Section 
6(b)(5) of the Act,\15\ because it is designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanisms of a free and open market and a national market system and, 
in general, to protect investors and the public interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change would assist 
with the maintenance of a fair and orderly market by establishing new 
activity based risk protections for orders. The Exchange currently 
offers a risk protection mechanism for market maker quotes that removes 
the member's quotes if a specified number of curtailment events occur 
during a set time period (``Market Wide Speed Bump'').\16\ The Exchange 
believes that this Market Wide Speed Bump functionality has been 
successful in reducing market maker risk and now proposes to adopt risk 
protections for orders that would allow other members to properly 
manage their exposure to excessive risk. In particular, the proposed 
rule change would implement two new risk protections based on the rate 
of order entry and order execution, respectively. The Exchange believes 
that both of these new protections, which together encompass the 
proposed Market Wide Risk Protection, would enable members to better 
manage their risk when trading options on the Exchange by limiting the 
member's risk exposure when systems or other issues result in orders 
being entered or executed at a rate that exceeds predefined thresholds. 
In today's market the Exchange believes that robust risk management is 
becoming increasingly more important for all members. The proposed rule 
change would provide an additional layer of risk protection for market 
participants that trade on the Exchange.
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    \16\ See Rule 804(g)(2).
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    The proposed Market Wide Risk Protection is similar to risk 
management functionality provided by other options exchanges, 
including, for example, the MIAX Options Exchange (``MIAX''), which 
recently received Commission approval for its ``Risk Protection 
Monitor'' for orders.\17\ In particular, the Market Wide Risk 
Protection is designed to reduce risk associated with system errors or 
market events that may cause members to send a large number of orders, 
or receive multiple, automatic executions, before they can adjust their 
exposure in the market. Without adequate risk management tools, such as 
those proposed in this filing, members could reduce the amount of order 
flow and liquidity that they provide. Such actions may undermine the 
quality of the markets available to customers and other market 
participants. Accordingly, the proposed rule change is designed to 
encourage members to submit additional order flow and liquidity to the 
Exchange, thereby removing impediments to and perfect [sic] the 
mechanisms of a free and open market and a national market system and, 
in general, protecting investors and the public interest. In addition, 
providing members with more tools for managing risk will facilitate 
transactions in securities because, as noted above, the members will 
have more confidence that protections are in place that reduce the 
risks from potential system errors and market events. As a result, the 
new functionality has the potential to promote just and equitable 
principles of trade.
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    \17\ See supra note 9 [sic].
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    The Exchange also believes that it is consistent with the 
protection of investors and the public interest to offer the Market 
Wide Risk Protection to members across both ISE Gemini and ISE as this 
will permit members to more effectively manage their risk 
simultaneously on both markets if desired. The Exchange already offers 
cross market risk protections for market makers [sic] quotes,\18\ and 
is now proposing to similarly offer a cross market risk protection for 
orders in order to reduce the risk that members face when entering 
orders on multiple exchanges. The Exchange notes that issues that would 
trigger the Market Wide Risk Protection are not normally confined to a 
member's activity on a single exchange. Accordingly, the Exchange 
believes that offering the Market Wide Risk Protection on a cross-
market basis would help members to more effectively manage their risk 
when trading on multiple markets, and reduce disruptive trading events 
to the benefit of all members and investors.
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    \18\ See Securities Exchange Act Release Nos. 71758 (March 20, 
2014), 79 FR 16846 (March 26, 2014) (``Notice''); 73148 (September 
19, 2014), 79 FR 57626 (September 25, 2014) (Approval) (SR-ISE 
Gemini-2014-09).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\19\ the Exchange 
does not believe that the proposed rule change would impose any burden 
on intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
Market Wide Risk Protection is similar to risk protections already 
available on other options exchanges,\20\ and is designed to be a 
competitive offering that would mitigate the risk associated with 
trading on the Exchange. Market makers already benefit from Market Wide 
Speed Bump functionality available for quotes. The proposed change 
would extend new risk protections to orders so that additional market 
participants can benefit from risk mitigating functionality. Like the 
Exchange's Market Wide Speed Bump, the proposed rule change would also 
be offered cross-market to members that want to be protected from 
inadvertent exposure to excessive risk when trading on both ISE Gemini 
and ISE. Permitting this functionality to be cross-market will not have 
any impact on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. In addition, the proposed 
functionality would be mandatory for all members, and would be made 
available on an equal and non-discriminatory basis. As such, the 
Exchange does not believe that the proposed rule change would impose 
any unnecessary burden on competition.
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    \19\ 15 U.S.C. 78f(b)(8).
    \20\ See supra notes 10 [sic] and 15 [sic].

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[[Page 20024]]

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 or within 
such longer period (1) as the Commission may designate up to 45 days of 
such date if it finds such longer period to be appropriate and 
publishes its reasons for so finding or (2) 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 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-ISEGemini-2016-03 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-ISEGemini-2016-03. 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 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-ISEGemini-2016-03 and should 
be submitted on or before April 27, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-07833 Filed 4-5-16; 8:45 am]
BILLING CODE 8011-01-P