[Federal Register Volume 81, Number 102 (Thursday, May 26, 2016)]
[Notices]
[Pages 33565-33567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12389]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77881; File No. SR-ISEGemini-2016-03]
Self-Regulatory Organizations; ISE Gemini, LLC; Order Approving
Proposed Rule Change Related to Market Wide Risk Protection
May 20, 2016.
I. Introduction
On March 17, 2016, ISE Gemini, LLC (the ``Exchange'' or ``ISE
Gemini'') 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 introduce new activity-based risk protection
functionality. The proposed rule change was published for comment in
the Federal Register on April 6, 2016.\3\ No comment letters were
received in response to this proposal. This order approves the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 77488 (Mar. 31,
2016), 81 FR 20021 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposed to introduce two activity-based risk
protection measures that will be mandatory for all members: (1) The
``Order Entry Rate Protection,'' which prevents members from entering
orders at a rate that exceeds predefined thresholds,\4\ and (2) the
``Order Execution Rate Protection,'' which prevents members from
executing orders at a rate that exceeds their predefined risk settings
(together, ``Market Wide Risk Protection''). The Exchange will announce
the implementation date of the proposed
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rule in a circular to be distributed to members prior to
implementation.\5\
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\4\ The Exchange stated that it will initiate the Order Entry
Rate Protection pre-open, but in a manner that allows members time
to load their orders without inadvertently triggering the
protection. The Exchange further noted that it will establish and
communicate the precise initiation time via circular and prior to
implementation. See Notice, supra note 3, at 20022 n.4.
\5\ See Notice, supra note 3, at 20022.
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Pursuant to proposed Rule 714(d), ``Market Wide Risk Protection,''
the Exchange's trading system (the ``System'') will maintain one or
more counting programs on behalf of each member that will track the
number of orders entered and the number of contracts traded on ISE
Gemini or, if chosen by the member, across both ISE Gemini and its
affiliate, International Securities Exchange, LLC (``ISE'').\6\ Members
may also 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\
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\6\ Members may set different risk parameters for their trading
activity on each exchange, or they may set risk parameters that
apply to their trading across both ISE Gemini and ISE. See proposed
Rule 714(d).
\7\ The Exchange stated that it will explain how members can go
about setting up risk protections for different groups (e.g.,
business units) in a circular issued to members. See Notice, supra
note 3, at 20022 n.7.
\8\ See proposed Rule 714(d). The Exchange clarified that a
member's allowable order rate for the Order Entry Rate Protection
will be comprised of parameter (1), while the allowable contract
execution rate for the Order Execution Rate Protection will be
comprised of parameter (2). The Exchange further explained that
contracts executed on the agency and contra-side of a two-sided
crossing order will be counted separately for the Order Execution
Rate Protection. See Notice, supra note 3, at 20022.
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According to the Exchange, members will have the discretion to
establish the applicable time period for each of the counts maintained
under the Market Wide Risk Protection, provided that the selected
period is within minimum and maximum time parameters that will be
established by the Exchange and announced via circular.\9\ By contrast,
the Exchange's proposal does not establish minimum or maximum values
for the order entry or execution parameters described in (1) and (2)
above. Nevertheless, the Exchange will establish default values \10\
for the time period, order entry, and contracts traded parameters in a
circular to be distributed to members. The Exchange represented that
such default values will apply only to members that do not submit their
own parameters for the Market Wide Risk Protection measures.\11\
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\9\ Id. The Exchange stated that it anticipated setting these
minimum and maximum time parameters at one second and a full trading
day, respectively. See Notice, supra note 3, at 20022 n.9.
\10\ See proposed Rule 714(d); see also Notice, supra note 3, at
20022.
\11\ Id.
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Under proposed Rule 714(d), the System will trigger the Market Wide
Risk Protection when it determines that the member has either (1)
entered a number of orders exceeding its designated allowable order
rate for the specified time period, or (2) executed a number of
contracts exceeding its designated allowable contract execution rate
for the specified time period.\12\ If the member's thresholds have 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 set by the member, across both ISE
Gemini and ISE.\13\ In addition, if the member has opted in to this
functionality, the System will automatically cancel all of the member's
existing orders.\14\ 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.\15\
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\12\ Id.; see also proposed Rule 714(d)(1). Specifically, after
a member enters or executes an order, the System will look back over
the specified time period to determine whether the member has
exceeded the relevant thresholds. See Notice, supra note 3, at
20022. In the Notice, the Exchange provided examples illustrating
how the Market Wide Risk Protection functionality would work both
for order entry and order execution protections. See Notice, supra
note 3, at 20022-23.
\13\ According to the Exchange, members that set different risk
parameters for ISE Gemini and ISE will only have their orders
rejected on the exchange whose threshold was exceeded. See Notice,
supra note 3, at 20022 n.10.
\14\ Proposed Rule 714(d)(2).
\15\ Proposed Rule 714(d)(3). Members who have not opted to
cancel all existing orders under proposed Rule 714(d)(2), however,
will still be able to interact with their existing orders entered
before the Market Wide Risk Protection was triggered. For instance,
such members may send cancel order messages and/or receive trade
executions for those orders. Id.; see also Notice, supra note 3, at
20022.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act \16\
and rules and regulations thereunder applicable to a national
securities exchange.\17\ In particular, the Commission finds that the
proposed rule change is consistent with the requirements of Section
6(b)(5) of the Act, which requires, among other things, that the rules
of a national securities exchange be designed to promote just and
equitable principles of trade, to 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.\18\
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\16\ 15 U.S.C. 78f(b).
\17\ In approving these proposed rule changes, the Commission
has considered the proposed rules' impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\18\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the Exchange's proposed activity-based
order protections will provide an additional tool to members to assist
them in managing their risk exposure.\19\ Specifically, the Commission
believes that the Market Wide Risk Protection functionality may help
members to mitigate the potential risks associated with entering and/or
executing a level of orders that exceeds their risk management
thresholds that may result from, for example, technology issues with
electronic trading systems. Further, the Commission notes that other
exchanges have established risk protection mechanisms for members and
market makers that are similar in many respects to ISE Gemini's
proposal.\20\
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\19\ The Exchange currently provides members with limit order
price protections that reject orders priced too far outside of the
Exchange's best bid or offer. See ISE Gemini Rule 714(b)(2).
\20\ See, e.g., Miami International Securities Exchange, LLC
Rule 519A (``Risk Protection Monitor''); BATS BZX Exchange, Inc.
Rule 21.16 (``Risk Monitor Mechanism'').
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Proposed Rule 714(d) imposes a mandatory obligation on ISE Gemini
members to utilize the Market Wide Risk Protection functionality. The
Commission notes that, although the Exchange will establish minimum and
maximum permissible parameters for the time period values, members will
have discretion to set the threshold values for the order entry and
order execution parameters.\21\ If members do not independently set
such parameters, they will be subject to the default parameters
established by ISE Gemini.\22\ While the Commission believes that the
Exchange's proposed rule provides members flexibility to tailor the
Market Wide Risk Protection to their respective risk management needs,
the Commission reminds members to be mindful of their obligations to,
among other things, seek best execution of orders they handle on an
agency basis and consider their best execution obligations when
establishing parameters for the Market Wide Risk Protection or
utilizing the default
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parameters set by ISE.\23\ For example, an abnormally low order entry
parameter, set over an abnormally long specified time period should be
carefully scrutinized, particularly if a member's order flow to ISE
Gemini contains agency orders. To the extent that a member chooses
sensitive parameters, a member should consider the effect of its chosen
settings on its ability to receive a timely execution on marketable
agency orders that it sends to ISE Gemini in various market conditions.
The Commission cautions brokers considering their best execution
obligations to be aware that the agency orders they represent may be
rejected as a result of the Market Wide Risk Protection functionality.
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\21\ The Exchange has represented that it 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,
which the Commission believes gives members wide latitude in
establishing the applicable time periods. See Notice, supra note 3,
at 20022 n.9.
\22\ Proposed Rule 714(d).
\23\ See Securities Exchange Act Release No. 37619A (Sept. 6,
1996), 61 FR 48290, at 48323 (Sept. 12, 1996) (Order Execution
Obligations adopting release); see also Securities Exchange Act
Release No. 51808 (June 9, 2005), 70 FR 37496, 37537-8 (June 29,
2005) (Regulation NMS adopting release).
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As discussed above, ISE Gemini determined not to establish minimum
and maximum permissible settings for the order entry and order
execution parameters in its rule and indicated its intent to set a
minimum and maximum for the time period parameters that provide broad
discretion to members (i.e., one second and a full trading day,
respectively).\24\ In light of these broad limits, the Commission
expects ISE Gemini to periodically assess whether the Market Wide Risk
Protection measures are operating in a manner that is consistent with
the promotion of fair and orderly markets, including whether the
default values and minimum and maximum permissible parameters for the
applicable time period established by ISE Gemini continue to be
appropriate and operate in a manner consistent with the Act and the
rules thereunder.
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\24\ See Notice, supra note 3, at 20022 n.9; see also supra note
21.
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Finally, the Commission believes that it is consistent with the Act
for ISE Gemini to offer its Market Wide Risk Protection across both ISE
Gemini and its affiliate, ISE, as such functionality could assist
members in managing and reducing inadvertent exposure to excessive risk
across both of these markets if the member desires to avail itself of
that feature. Further, the Commission notes that it previously approved
ISE Gemini's proposal to offer cross-market risk protections for market
maker quotes, and approval of the cross-market application of the
Market Wide Risk Protection functionality is consistent with that prior
approval.\25\
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\25\ See ISE Gemini Rule 804(g); see also Securities Exchange
Act Release No. 73148 (Sept. 19, 2014), 79 FR 57626 (Sept. 25, 2014)
(SR-ISEGemini-2014-09) (approval order).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-ISEGemini-2016-03) be, and
hereby is, approved.
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\26\ 15 U.S.C. 78s(b)(2).
\27\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12389 Filed 5-25-16; 8:45 am]
BILLING CODE 8011-01-P