[Federal Register Volume 81, Number 227 (Friday, November 25, 2016)]
[Notices]
[Pages 85277-85280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28308]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79352; File No. SR-ISE-2016-26]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change To Reduce the Response 
Times in the Block Mechanism, Facilitation Mechanism, Solicited Order 
Mechanism and Price Improvement Mechanism

November 18, 2016.
    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 8, 2016, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II 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 amend Rules 716 (Block Trades) and 723 
(Price Improvement Mechanism for Crossing Transactions) to reduce the 
response times in the Block Order Mechanism, Facilitation Mechanism, 
Solicited Order Mechanism, and Price Improvement Mechanism. The text of 
the proposed rule change is available on the Exchange's Web site at 
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 Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant aspects of such statements.

[[Page 85278]]

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 the time period 
allowed for member submission of responses in the Block Order 
Mechanism, Facilitation Mechanism, Solicited Order Mechanism, and Price 
Improvement Mechanism (``PIM'') from 500 milliseconds (\1/2\ of one 
second) to a time period designated by the Exchange of no less than 100 
milliseconds (1/10 of one second) and no more than 1 second.\3\
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    \3\ While the Exchange intends to decrease the time period 
allowed for responses, the proposed rule would also allow the 
Exchange to increase this time period up to 1 second, which is the 
time period previously allowed for the submission of responses. See 
Securities Exchange Act Release No. 58224 (July 25, 2008), 73 FR 
44303 (July 30, 2008) (SR-ISE-2007-94).
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    Rule 716 contains the requirements applicable to the execution of 
orders using the Block Order Mechanism, Facilitation Mechanism, and 
Solicited Order Mechanism. The Block Order Mechanism allows members to 
obtain liquidity for the execution of a block-size order,\4\ and the 
Facilitation and Solicited Order Mechanisms allow members to enter 
cross transactions seeking price improvement.\5\ Rule 723 contains the 
requirements applicable to the execution of orders using the PIM. The 
PIM allows members to enter cross transactions of any size. The 
Facilitation, Solicited Order Mechanisms and PIM allow for members to 
designate certain customer orders for price improvement and submit such 
orders into one of the mechanisms with a matching contra order. Once 
the order is submitted, the Exchange commences an auction by 
broadcasting a message to all members that includes the series, price, 
size and side of the market.\6\ Further, responses within the PIM 
(i.e., Improvement Orders), are also broadcast to market participants 
during the auction. Orders entered into any of these mechanisms 
currently are exposed to all market participants for 500 milliseconds, 
giving them an opportunity to enter additional trading interest before 
the orders are automatically executed. Under the proposal, the Exchange 
would determine an appropriate exposure period for each of the four 
auction mechanisms that is no less than 100 milliseconds and no more 
than 1 second, consistent with exposure periods permitted on other 
exchanges such as NASDAQ BX (``BX'') and NASDAQ PHLX (``Phlx'').\7\ 
When approving the previous change to exposure periods in these 
mechanisms the Securities and Exchange Commission concluded that 
reducing these time periods was consistent with the Securities Exchange 
Act of 1934 (the ``Act'').\8\
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    \4\ Block-size orders are orders for 50 contracts or more. See 
Rule 716(a).
    \5\ Only block-size orders can be entered into the Facilitation 
Mechanism, whereas only orders for 500 contracts or more can be 
entered into the Solicited Order Mechanism. See Rule 716(d) and (e).
    \6\ Members may choose to hide the size, side, and price when 
entering orders into the Block Order Mechanism.
    \7\ See Securities Exchange Act Release No. 76301 (October 29, 
2015), 80 FR 68347 (November 4, 2015) (SR-BX-2015-032) and 
Securities Exchange Act Release No. 77557 (April 7, 2016), 81 FR 
21935 (April 13, 2016) (SR-PHLX-2016-40).
    \8\ See Exchange Act Release No. 68849 (February 6, 2013), 78 FR 
9973 (February 12, 2013) (SR-ISE-2012-100).
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    The Exchange is not proposing any change to the requirement in Rule 
717(d) and (e) that requires an Electronic Access Member (``EAM'') to 
expose its customer's order on the book for at least one second before 
either executing such agency order as principal or against orders 
solicited from members and non-members, unless the EAM submits the 
agency order to the Facilitation Mechanism, Solicited Order Mechanism, 
or PIM.\9\ The Exchange believes this exception for the Facilitation 
Mechanism, Solicited Order Mechanism and PIM is appropriate because the 
customer order is guaranteed an execution at the National Best Bid/
Offer (``NBBO'') or a better price through the Facilitation Mechanism, 
Solicited Order Mechanism and PIM. Additionally, members are informed 
about the agency order starting the auction through receipt of the 
broadcast. Members have the opportunity to compete for participation in 
the execution of the customer order by responding to the broadcast with 
their best priced responses.
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    \9\ Since EAMs submitting orders into the Block Mechanism do not 
have the contra order, Rule 717(d) and (e) does not apply.
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    With respect to the Facilitation Mechanism, Solicited Order 
Mechanism, and PIM, the Exchange believes the proposed rule change 
could provide more customer orders an opportunity for price improvement 
because it will reduce the market risk for all members executing trades 
in these mechanisms. Members that submit orders into such mechanisms to 
initiate an auction (``Initiating Members'') are required to guarantee 
an execution at the NBBO or a better price, and are subject to market 
risk while the order is exposed in one of the mechanisms to other 
members. While other members are also subject to market risk, the 
Initiating Member is most exposed because the market can move against 
them during the auction period and they have guaranteed the customer an 
execution at the NBBO or better based on the market prices prior to the 
commencement of the auction. In today's fast-paced markets, big price 
changes can occur in 100 milliseconds or less, leaving the Initiating 
Members vulnerable to trading losses due to their choice to seek price 
improvement for their customer. The Initiating Member acts in a 
critical role in the price improvement process and their willingness to 
guarantee the customer an execution at the NBBO or a better price is 
keystone to the customer order gaining the opportunity for price 
improvement. Therefore, limiting Initiating Members' market risk by 
reducing the exposure time in the mechanisms should increase the 
likelihood that an Initiating Member would seek price improvement for 
its customer by entering such orders into one of the mechanisms.
    Additionally, the Exchange does not believe that requiring the 
auction to run for 500 milliseconds is necessary in today's market 
where, generally, members' systems have the capability to respond 
within 100 milliseconds or faster. As such, reducing the response time 
in the Block Order Mechanism is appropriate as members no longer need 
500 milliseconds to respond to the auction. Reducing the auction time 
for the Block Order Mechanism from 500 milliseconds to as low as 100 
milliseconds will allow members the opportunity to seek out liquidity 
in an expedient manner that is consistent with system capabilities.
    Furthermore, although the Exchange currently plans to reduce the 
time period allowed for the submission of auction responses to 100 
milliseconds, the Exchange believes that it is appropriate to provide 
the flexibility to choose a response period of up to 1 second as this 
is consistent with the rules of other options markets.\10\
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    \10\ See note 7 supra.
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    The Exchange's members operate electronic systems that enable them 
to react and respond to orders in a meaningful way in fractions of a 
second. The Exchange anticipates that its members will continue to 
compete within the proposed auction duration designated by the 
Exchange. In particular, the Exchange believes that the proposed 
auction response times--which will be no less than 100 milliseconds and 
no more than 1

[[Page 85279]]

second--will continue to provide members with sufficient time to 
respond to, compete for, and provide price improvement for orders, and 
will provide investors and other market participants with more timely 
executions, and reduce their market risk.
    Reducing the duration of the auctions from 500 milliseconds to as 
low as 100 milliseconds will benefit members trading in the mechanisms. 
It is in these members' best interest to minimize the auction time 
while continuing to allow members adequate time to electronically 
respond. Both the order being exposed and the members' responses are 
subject to market risk during the auction. While a limited number of 
members wait to respond until later in the auction, presumably to 
minimize their market risk, in more than 94% of executions occurring in 
the mechanisms members respond within the first 100 milliseconds. The 
Exchange believes that an auction time as low as 100 milliseconds will 
continue to provide market participants with sufficient time to 
respond, compete, and provide price improvement for orders and will 
provide investors and other market participants with more timely 
executions, thereby reducing their market risk.\11\
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    \11\ With Block Orders, the member enters one side of the order 
in an effort to find contra-side liquidity. While this order is 
exposed, the member is exposed to market risk. Therefore, reducing 
the exposure time will reduce the market risk for Block Orders just 
as it will reduce the market risk with respect to orders entered 
into the Facilitation Mechanism, Solicited Order Mechanism, and PIM.
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    To substantiate that members can receive, process, and communicate 
a response to an auction broadcast within 100 milliseconds, the 
Exchange surveyed all members that responded to an auction in the 
period beginning July 1, 2015 and ending January 15, 2016. The Exchange 
received responses from all of the 21 members surveyed, and each member 
confirmed that they can receive, process, and communicate a response 
back to the Exchange within 100 milliseconds.
    Also in consideration of this proposed rule change, the Exchange 
reviewed all executions occurring in the mechanisms by its Members from 
March 28, 2016--April 25, 2016. This review of executions in the 
mechanisms indicates that approximately 98% of responses that resulted 
in price improving executions at the conclusion of an auction were 
submitted within 500 milliseconds. Approximately 94% of responses that 
resulted in price improving executions at the conclusion of an auction 
were submitted within 100 milliseconds of the initial order, and 83% 
were submitted within 50 milliseconds of the initial order.
    Accordingly, the Exchange believes that an auction time as low as 
100 milliseconds will continue to provide members with sufficient time 
to respond to, compete for, and provide price improvement for orders, 
and will provide investors and other market participants with more 
timely executions, and reduce their market risk. Moreover, 
Supplementary Material .04 to Rule 723 provides that the PIM will not 
run simultaneously with or overlap another PIM in the same series. As a 
result, members may be unable to initiate PIMs on behalf of their 
customers. Reducing the auction time to as low as 100 milliseconds will 
decrease the likelihood that an auction is underway when a customer 
order is received. Accordingly, the Exchange believes it is likely that 
the number of PIM transactions will increase, thereby providing 
customers a greater opportunity to benefit from price improvement.
    The Exchange believes that the information outlined above regarding 
price improving transactions in the mechanisms and the feedback 
provided by members provides substantial support for its assertion that 
reducing the auction from 500 milliseconds to as low as 100 
milliseconds will continue to provide members with sufficient time to 
ensure competition for orders entered into the mechanisms, and could 
provide customer orders with additional opportunities for price 
improvement.
    With regard to the impact of this proposal on system capacity, the 
Exchange has analyzed its capacity and represents that it has the 
necessary systems capacity to handle the potential additional traffic 
associated with the additional transactions that may occur with the 
implementation of the proposed reduction in the auction duration to no 
less than 100 milliseconds. Additionally, the Exchange represents that 
its systems will be able to sufficiently maintain an audit trail for 
order and trade information with the reduction in the auction duration. 
Further, although the Exchange and its members are fully capable of 
handling a response time of 100 milliseconds, the Exchange proposes to 
reduce the auction time over a period of weeks ending at 100 
milliseconds. This will ensure a smooth implementation of the faster 
timers and that the Exchange's and its members' systems are working 
properly given the faster response times.
    Upon effectiveness of the proposal, and at least six weeks prior to 
implementation of the proposed rule change, the Exchange will issue a 
circular to members, informing them of the implementation date of the 
reduction of the auction from 500 milliseconds to the auction time 
designated by the Exchange to allow members the opportunity to perform 
systems changes. This will give members an opportunity to make any 
necessary modifications to coincide with the implementation date. The 
Exchange also represents that it will issue a circular at least four 
weeks prior to any future changes, as permitted by its rules, to the 
auction time.
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.\12\ In 
particular, the proposal is consistent with Section 6(b)(5) of the 
Act,\13\ 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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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change will provide investors with 
more timely execution of their options orders, while ensuring that 
there is an adequate exposure of orders in the mechanisms. 
Additionally, the proposed change will allow more investors the 
opportunity to receive price improvement through the mechanisms, and 
will reduce market risk for members using the mechanisms. Finally, as 
mentioned above, other exchanges such as BX and Phlx, have already 
amended their rules to permit response times consistent with those 
proposed here--i.e., no less than 100 milliseconds and no more than 1 
second.\14\ As such, the Exchange believes the proposed rule change 
would help perfect the mechanism for a free and open national market 
system, and generally help protect investors' and the public's 
interest.
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    \14\ See note 7 supra.
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    The Exchange believes the proposed rule change is not unfairly 
discriminatory because the auction duration would be the same for all 
members. All members in the mechanisms have today, and will continue to 
have, an equal opportunity to receive the broadcast and respond with 
their best prices during the

[[Page 85280]]

auction. Additionally, the Exchange believes the reduction in the 
auction duration reduces the market risk for all members. The reduction 
in time period reduces the market risk for the Initiating Member as 
well as any members providing orders in response to a broadcast. 
Moreover, based on the feedback the Exchange received from its members, 
the Exchange believes that a reduction in the auction period to a low 
of 100 milliseconds would not impair members' ability to compete in the 
mechanisms. The Exchange believes these results support the assertion 
that a reduction in the auction duration would not be unfairly 
discriminatory and would benefit investors.

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

    The Exchange believes the proposal is consistent with Section 
6(b)(8) of the Act \15\ in that it does not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The proposed rule change is not designed to 
address any aspect of competition, but instead would continue to 
provide market participants with sufficient time to respond, compete, 
and provide price improvement for orders in the Exchange's auction 
mechanisms. The proposed rule also provides investors and other market 
participants with more timely executions, thereby reducing their market 
risk. As proposed, the rule does not impose an undue burden on members 
because they are all currently capable of responding to these 
mechanisms in under 100 milliseconds. Finally, the proposed rule change 
offers the same exposure period to all members and would not impose a 
competitive burden on any particular participant.
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    \15\ 15 U.S.C. 78f(b)(8).
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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 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-2016-26 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-2016-26. 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-ISE-2016-26 and should be 
submitted on or before December 16, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-28308 Filed 11-23-16; 8:45 am]
 BILLING CODE 8011-01-P