[Federal Register Volume 82, Number 50 (Thursday, March 16, 2017)]
[Notices]
[Pages 14090-14092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05209]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80200; File No. SR-ISEGemini-2017-12]


Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to the 
Decommission of the Tick-Worse Functionality

March 10, 2017.
    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 February 28, 2017, ISE Gemini, LLC (``ISE Gemini'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III, 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 (i) to describe the decommission of its 
``Tick-Worse'' functionality and (ii) to amend Rule 713 (Priority of 
Quotes and Orders) relating to the priority of split price 
transactions.
    The Exchange requests that the proposed rule change become 
operative on February 28, 2017.
    The text of the proposed rule change is available on the Exchange's 
Web site at 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 Exchange 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 (i) to describe the 
decommission of the ``Tick-Worse'' functionality and (ii) to amend Rule 
713 (Priority of Quotes and Orders) as it relates to the priority of 
split price transactions. The proposed changes are discussed below.

``Tick-Worse'' Functionality

    The Exchange currently provides market makers \3\ with Tick-Worse 
functionality, which allows market makers to pre-define the prices and 
sizes at which the system will automatically move their quotation 
following an execution that exhausts the size of their existing 
quotation.\4\ As such, when a market maker's quote is traded out, it 
can be automatically reinstated into the Exchange's order book at the 
next best price.\5\ This optional feature is intended to help market 
makers meet their continuous quoting obligations under the Exchange's 
rules \6\ when their displayed quotations are exhausted. When a market 
maker's quote is traded out and automatically reinstated into the 
Exchange's order book using the Tick-Worse functionality, the 
reinstated quote will be given priority pursuant to the Exchange's 
split price priority rule as discussed below.
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    \3\ The term ``market makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See Rule 
100(a)(25).
    \4\ Tick-Worse functionality is not currently memorialized in 
the Exchange's rulebook. In addition, the Exchange will not offer 
Tick-Worse on the new Nasdaq INET system going forward. On September 
30, 2004, International Securities Exchange, LLC (``ISE'') filed 
with the Commission a proposal to codify this functionality in its 
rulebook, but inadvertently deleted the rule as obsolete rule text 
in a subsequent proposal filed on December 21, 2012. See Securities 
Exchange Act Release No. 51050 (January 18, 2005), 70 FR 3758 
(January 26, 2005) (SR-ISE-2004-31); Securities Exchange Act Release 
No. 68570 (January 3, 2013), 78 FR 1901 (January 9, 2013) (SR-ISE-
2012-82). The Exchange imported Rule 713 from ISE's rulebook when 
the Commission granted the Exchange's application for registration 
as a national securities exchange, which was after the Tick-Worse 
functionality rule was inadvertently removed from ISE's rules. See 
Securities Exchange Act Release No. 70050 (July 26, 2013), 78 FR 
46622 (August 1, 2013) (Order Granting Registration as a National 
Securities Exchange).
    \5\ Market makers may choose to set Tick-Worse parameters by 
specifying how many price ticks back, and for what size, the quote 
is to be reinstated.
    \6\ Specifically, Primary Market Makers (``PMMs'') are required 
under Rule 804(e)(1) to enter quotations in all of the series listed 
on the Exchange of the options classes to which they are appointed 
on a daily basis. Supplementary Material .01 to Rule 804 further 
requires PMMs to quote 90% of the time their assigned options class 
is open for trading on the Exchange. As provided in Rule 804(e)(2), 
Competitive Market Makers (``CMMs'') are not required to enter 
quotations in the options class to which they are appointed, but in 
the event a CMM does initiate quoting, such CMM is generally 
required to quote 60% of the time its assigned options class is open 
for trading on the Exchange.
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    Due to the lack of demand for the Tick-Worse feature, the Exchange 
decommissioned the use of this functionality on February 21, 2017 by 
asking its members to stop using Tick-Worse by February 21st.\7\ The 
Exchange plans to turn off this functionality in the system when the 
last symbol migrates onto the new Nasdaq INET system on or around April 
3, 2017 \8\ as part of its system migration to Nasdaq INET 
technology.\9\ As discussed above, the Exchange offers the Tick-Worse 
feature as a voluntary tool for market makers to assist them in meeting 
their continuous quoting obligations under the Exchange's rules. As 
such, market makers are not required to use the Exchange-provided 
functionality and can program their own systems to perform the same 
functions if they prefer. Here, the Exchange has found that almost all 
market makers use their own systems rather than the Exchange's Tick-
Worse feature to send refreshed quotations when their displayed 
quotations are exhausted, and therefore discontinued this 
functionality. Because the Tick-Worse functionality is currently not 
memorialized in the Exchange's rules as noted above, there is no text 
of the proposed rule change. The Exchange provided advance notice to 
its members on January 31, 2017 through an informational circular that 
it would decommission the use of the Tick-Worse functionality on 
February 21, 2017. The Exchange believes that this gave market makers 
the opportunity to make any necessary changes to their

[[Page 14091]]

Tick-Worse parameters to coincide with the implementation date.
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    \7\ This functionality was only being used by one market maker 
on the Exchange.
    \8\ The detailed schedule of the symbol migration is available 
at: http://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2017-13.
    \9\ See Securities Exchange Release No. 80011 (February 10, 
2017), 82 FR 10927 (February 16, 2017) (SR-ISEGemini-2016-17) (Order 
Approving Proposed Rule Change, as Modified by Amendment Nos. 1 and 
2, To Amend Various Rules in Connection With a System Migration to 
Nasdaq INET Technology).
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Split Price Priority

    The Exchange is proposing to delete Rule 713(f), which relates to 
the priority of split price transactions, because this priority rule 
currently only applies in the context of the Tick-Worse functionality, 
as described above. Rule 713(f) provides that if a Member purchases 
(sells) one (1) or more options contracts of a particular series at a 
particular price, it shall at the next lower (higher) price at which 
there are Professional Orders \10\ or market maker quotes, have 
priority over such Professional Orders and market maker quotes in 
purchasing (selling) up to the equivalent number of options contracts 
of the same series that it purchased (sold) at the higher (lower) 
price, but only if the purchase (sale) so effected represents the 
opposite side of a transaction with the same offer (bid) as the earlier 
purchase (sale). Although the language of Rule 713(f) is more general, 
the Exchange's intent was to apply split price priority solely to the 
Tick-Worse functionality. Example:
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    \10\ The term ``Professional Order'' means an order that is for 
the account of a person or entity that is not a Priority Customer. 
See Rule 100(a)(37C). A ``Priority Customer'' is 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). See Rule 
100(a)(37A).
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    PMM has opted into tick worse functionality and selected to tick 
worse and post 10 contracts at a penny worse than their original quote.

--PMM quote for 10 contracts bid at $1.00 and 10 contracts offered at 
$1.02.
--Additionally, there is a Priority Customer order to buy 5 contracts 
at $0.99, and a CMM quote for 10 contracts bid at $0.99 and 10 
contracts offered at $1.02.
--A member enters a sell order for 20 contracts at $0.99.
--This order will trade as follows: 10 contracts trade at $1.00 with 
the PMM bid quote, and PMM is ticked worse to 10 contracts bid at 
$0.99, 5 contracts trade at $0.99 with the Priority Customer order due 
to customer priority, 5 contracts trade at $0.99 with the PMM's ticked 
worse quote due to the split price priority rule; 0 contracts trade 
with the CMM bid quote.

    The Exchange represents that Tick-Worse has historically only ever 
applied in the context of the split price priority rule in Rule 713(f). 
Furthermore, the Exchange has historically only ever awarded priority 
pursuant to Rule 713(f) for split price transactions that occur in the 
Tick-Worse functionality, and the existing Rule should have been 
clarified to more accurately reflect its current application. 
Nonetheless, the Exchange is now proposing to delete the rule text in 
its entirety in order to reflect that the Tick-Worse functionality was 
decommissioned on February 21, 2017.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\12\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. The Exchange decommissioned the Tick-Worse functionality on 
February 21, 2017. As discussed above, the Exchange originally offered 
Tick-Worse as an optional feature to help market makers meet their 
continuous quoting obligations under the Exchange's rules. The Exchange 
has found, however, that the Tick-Worse feature is rarely used today as 
almost all market makers use their own systems to send refreshed 
quotations when their displayed quotations are exhausted. The Exchange 
therefore believes that this proposal describing the decommission of 
Tick-Worse on February 21st, together with the advance notice it 
provided to its members on January 31, 2017, eliminates any investor 
uncertainty related to the status of this functionality.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange also believes that its proposal to delete the split 
price priority rule in Rule 713(f) protects investors and the public 
interest because it removes rule text that became obsolete with the 
decommission of the Tick-Worse functionality. As described above, the 
split price priority rule only applies to the Tick-Worse functionality. 
Because the Rule is more general than its current, specific 
application, however, the Exchange believes that the continued presence 
of Rule 713(f) in its rules even after retiring the Tick-Worse 
functionality will be confusing to its members and investors. By 
removing obsolete rule text that only applies in the context of Tick-
Worse, the Exchange is eliminating any potential for confusion about 
how its systems operate.

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 not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change is not 
designed to have any competitive impact but rather to describe the 
decommission of a rarely-used functionality on the Exchange and 
relatedly, to remove the rule text that this functionality supports 
from the Exchange's rulebook, thereby reducing investor confusion and 
making the Exchange's rules easier to understand and navigate.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \13\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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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.

[[Page 14092]]

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-2017-12 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-2017-12. 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-2017-12 and should 
be submitted on or before April 6, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05209 Filed 3-15-17; 8:45 am]
BILLING CODE 8011-01-P