[Federal Register Volume 82, Number 51 (Friday, March 17, 2017)]
[Notices]
[Pages 14249-14251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05335]



[[Page 14249]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80219; File No. SR-ISE-2017-22]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Amend the Fee Schedule To Change the Definition of Net Zero 
Complex Order

March 13, 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 March 1, 2017, the International Securities Exchange, LLC (``ISE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II, 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 to amend its Schedule of Fees to change the 
definition of net zero complex order for purposes of determining 
eligibility for Priority Customer complex order rebates.
    While changes to the Schedule of Fees are effective upon filing, 
the Exchange has designated these changes to be operative on February 
10, 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 to amend the Schedule of 
Fees to change the definition of net zero complex order for purposes of 
determining eligibility for Priority Customer complex order rebates. 
Currently, the Exchange does not provide Priority Customer rebates for 
complex orders that that leg in to the regular order book and trade at 
a net price at or near $0.00 (i.e., net zero complex orders), provided 
those orders are entered on behalf of originating market participants 
that execute an ADV of at least 2,000 net zero complex orders in a 
given month.\3\ While these complex orders would generally not find a 
counterparty in the complex order book, they may leg in to the regular 
order book where they are typically executed by Market Makers \4\ or 
other market participants on the individual legs who pay a fee to trade 
with this order flow. The Exchange does not provide rebates for net 
zero complex orders to prevent members from engaging in rebate 
arbitrage by entering valueless complex orders solely to recover 
rebates. For purposes of determining which complex orders qualify as 
net zero, the Exchange counts all complex orders that leg in to the 
regular order book and are executed at a net price that is within a 
range of $0.01 credit and $0.01 debit. In particular, the Exchange 
calculates the net price of the complex order by multiplying the 
quantity on each leg by the amount of credit or debit for that leg, and 
summing the prices calculated with respect to each leg. Based on that 
calculation, the complex order is counted as net zero if the net price 
is within a range of $0.01 credit and $0.01 debit. This methodology is 
illustrated in the example below.
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    \3\ See Securities Exchange Act Release No. 77821 (May 12, 
2016), 81 FR 31270 (May 18, 2016). See also SR-ISE-2017-16 (pending 
publication). Priority Customer complex orders that do not meet the 
definition of a net zero complex order, or that are entered on 
behalf of originating market participants that do not reach the 
2,000 contract ADV threshold, remain eligible for rebates based on 
the tier achieved.
    \4\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See ISE Rule 
100(a)(25).

Example 1:
SPY Feb 188 Put, Buy 270 contracts @$0.01 = $2.70 debit
SPY Feb 193 Put, Sell 270 contracts @$0.01 = ($2.70) credit
Net price = $0 (i.e., $2.70--$2.70)

    The Exchange believes that its current methodology does not fully 
capture the trading activity that this provision is meant to cover, as 
the market participants that are entering these net zero orders have 
found a way to continue to earn a rebate for their valueless trades at 
the expense of the Exchange and the members who trade against these 
complex orders when they leg in to the regular market. In particular, 
these market participants have been submitting complex orders that are 
essentially valueless on a per contract basis, but that result in a net 
credit or debit on a full trade basis that is not within $0.01 credit 
or $0.01 debit based on the methodology illustrated in the example 
above. The Exchange therefore proposes to change its methodology to 
look at the net price per contract, which the Exchange believes more 
accurately captures its intentions in eliminating rebates for net zero 
complex orders. To calculate the net price per contract, the Exchange 
will use the same methodology described above, and then divide the 
calculated net price by the total quantity (i.e., the sum of the 
contracts for each leg).\5\ The Exchange believes that this methodology 
will discourage market participants from engaging in this valueless 
conduct as these non-economic complex orders will no longer be rebate 
eligible. The example below illustrates the proposed net zero per 
contract methodology.

    \5\ Complex orders executed from February 1, 2017 to February 9, 
2017 will be provided rebates based on the net zero logic in place 
prior to this filing.
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Example 2:
SPY Feb 188 Put, Buy 270 contracts @$0.01 = $2.70 debit
SPY Feb 199 Put, Buy 180 contracts@$0.02 = $3.60 debit
SPY Feb 193 Put, Sell 450 contracts @$0.01 = ($4.50) credit
Net price = $1.80 debit (i.e., $4.50 - $2.70 - $3.60)
Net price per contract = $0.002 debit (i.e., $1.80 / 900)

    Finally, the Exchange proposes to clarify that the current ADV 
threshold is based on the number of contracts executed in net zero 
complex orders. Although the Exchange has always calculated the ADV 
threshold, which is a measure of volume, based on the number of 
contracts executed, the Exchange believes that explicitly adding the 
word ``contract'' to this rule will avoid any possible confusion among 
members. Members will not receive rebates for net zero complex orders 
entered on behalf of originating market participants that execute an 
ADV of at

[[Page 14250]]

least 2,000 contracts in net zero complex orders in a given month.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\6\ in general, and Section 
6(b)(4) of the Act,\7\ in particular, in that it is designed to provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its members and other persons using its facilities.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed per contract methodology is 
reasonable and equitable as it is designed to remove financial 
incentives for market participants to engage in rebate arbitrage by 
entering net zero complex orders on the Exchange that do not have any 
economic substance. The Exchange currently has a rule in place to 
discourage members from entering net zero complex orders. The rule, 
however, is not sufficiently broad to stop this trading activity, as 
market participants continue to receive rebates for complex orders that 
would be considered net zero on a per contract basis. The Exchange is 
therefore proposing to modify its definition of a net zero complex 
order, consistent with its intent in adopting this provision. Priority 
Customer complex orders, including net zero complex orders that leg in 
to the regular order book, are currently paid significant rebates by 
the Exchange, which are funded in part by charging higher fees to the 
market participants that trade against these orders. The Exchange 
believes that changing the methodology used for determining net zero 
complex orders will discourage market participants from entering these 
valueless orders, which are entered for the sole purpose of earning a 
rebate.
    In January 2017, no market participants met the 10,000 contract ADV 
threshold for net zero complex orders based on the current net zero 
criteria. In addition, no market participants that traded complex 
orders on the Exchange during January 2017 would have met the lower 
2,000 contract ADV threshold implemented this February.\8\ This is not 
due to market participants stopping this behavior but rather to firms 
modifying their activity to get around the net zero criteria 
implemented in the original net zero filing. With the proposed per 
contract change, the Exchange believes that market participants engaged 
in rebate arbitrage will be effectively prohibited from earning rebates 
for their net zero complex orders. In January 2017, for example, the 
Exchange notes that although no market participants met the net zero 
ADV threshold based on current criteria, five market participants would 
have met the current threshold based on the proposed criteria. Based on 
the proposed per contract methodology, each of these market 
participants executed a net zero ADV of greater than 7,000 contracts 
compared to a net zero ADV of less than 300 contracts for the next 
highest market participant, and an average net zero ADV of 
approximately 6 contracts for all market participants that entered 
complex orders on the Exchange during the month of January other than 
the five that would have surpassed the threshold. In addition, the 
Exchange notes that the vast majority of market participants that 
entered complex orders on the Exchange in January 2017 would continue 
to have a net zero ADV of 0 contracts based on the per contract 
methodology.
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    \8\ See supra note 3.
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    The continued submission by a handful of market participants of a 
high volume of net zero complex orders that leg into the regular order 
book has generated complaints from the Market Makers that trade against 
these orders in the regular order book, as firms recognize these net 
zero complex orders as essentially non-economic. The Exchange believes 
that adopting the proposed per contract methodology will make it more 
difficult for firms to continue to enter net zero complex orders purely 
to earn a rebate. This will reduce the cost of these trades to the 
Exchange and its members as firms are limited in the amount of this net 
zero complex order activity that they can conduct on the Exchange.
    The Exchange also believes that the proposed rule change is not 
unfairly discriminatory as it is designed to stop market participants 
from taking advantage of Exchange rebates by entering orders that lack 
economic substance. The Exchange is proposing to eliminate Priority 
Customer complex order rebates for all market participants that execute 
a large number of net zero complex orders based on the proposed 
methodology. To the extent that those market participants execute 
legitimate complex orders, however, they will continue to receive the 
same rebates that they do today. In addition, market participants that 
execute an insubstantial volume of net zero complex orders will also 
continue to receive rebates. The Exchange does not believe that it is 
unfairly discriminatory to continue to offer rebates to firms that do 
not hit the net zero ADV threshold as this more limited trading 
activity is not indicative of rebate arbitrage. While the Exchange 
could prohibit rebates for any net zero complex orders without an ADV 
threshold, doing so would disadvantage innocent market participants 
that are not engaged in rebate arbitrage. The Exchange believes that 
the decision to allow rebates for firms with a limited ADV in net zero 
complex orders properly balances the need to encourage market 
participants to send order flow to the Exchange, and the need to 
prevent activity that is harmful to the market. Moreover, all market 
participants will be treated the same based on their net zero ADV.
    Finally, the Exchange believes that addition of the word 
``contract'' to the ADV threshold is reasonable, equitable, and not 
unfairly discriminatory as this change will clarify for members that 
the ADV threshold, which is a measure of volume, is calculated based on 
the number of contracts executed. The Exchange notes that this is not a 
change to the Exchange's current practice but is a simple clean up 
change to make the Schedule of Fees easier for members to understand.

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

    In accordance with Section 6(b)(8) of the Act,\9\ the Exchange does 
not believe that the proposed rule change will impose any burden on 
intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. By refining the 
definition of net zero complex order, the proposed rule change is 
designed to eliminate the ability for certain market participants to 
engage in rebate arbitrage to the detriment of the Exchange and its 
members. In addition, adding the word ``contract'' to the ADV threshold 
is a non-substantive change made purely for clarification. The Exchange 
operates in a highly competitive market in which market participants 
can readily direct their order flow to competing venues. In such an 
environment, the Exchange must continually review, and consider 
adjusting, its fees and rebates to remain competitive with other 
exchanges. For the reasons described above, the Exchange believes that 
the proposed fee changes reflect this competitive environment.
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    \9\ 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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act,\10\ and Rule 19b-4(f)(2) \11\ thereunder. 
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.
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    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 17 CFR 240.19b-4(f)(2).
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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-2017-22 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-ISE-2017-22. 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-2017-22 and should be 
submitted on or before April 7, 2017.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05335 Filed 3-16-17; 8:45 am]
 BILLING CODE 8011-01-P