[Federal Register Volume 82, Number 155 (Monday, August 14, 2017)]
[Notices]
[Pages 37966-37969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-17065]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81350; File No. SR-ISE-2017-77]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Its 
Schedule of Fees

August 8, 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 August 1, 2017, Nasdaq ISE, 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 (1) 
eliminate Priority Customer complex order rebates for all net zero 
complex orders without any associated average daily volume requirement, 
and (2) reduce the maker fee charged to Market Makers and Non-Nasdaq 
ISE Market Makers for Regular Orders in Select Symbols when trading 
against Priority Customer complex orders that leg into the regular 
order book.
    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

[[Page 37967]]

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 to amend the Schedule of 
Fees to (1) eliminate Priority Customer \3\ complex order rebates for 
all net zero complex orders without any associated average daily volume 
(``ADV'') requirement, and (2) reduce the maker fee charged to Market 
Makers \4\ and Non-Nasdaq ISE Market Makers \5\ for Regular Orders in 
Select Symbols \6\ when trading against Priority Customer complex 
orders that leg into the regular order book. These changes are designed 
to eliminate rebate arbitrage where market participants enter valueless 
complex orders solely for the purpose of earning a rebate, and to 
reduce disincentives for Market Makers to provide liquidity on the 
Exchange.
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    \3\ A ``Priority Customer'' is a person or entity that is not a 
broker/dealer in securities, and does not place more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s), as defined in Nasdaq ISE Rule 
100(a)(37A).
    \4\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See ISE Rule 
100(a)(25).
    \5\ A ``Non-Nasdaq ISE Market Maker'' is a market maker as 
defined in Section 3(a)(38) of the Securities Exchange Act of 1934, 
as amended, registered in the same options class on another options 
exchange.
    \6\ ``Select Symbols'' are options overlying all symbols listed 
on the Nasdaq ISE that are in the Penny Pilot Program.
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    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 per contract that is 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 1,000 
contracts in net zero complex orders in a given month. 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 per contract that is within a range of $0.01 
credit and $0.01 debit. The Exchange now proposes to eliminate Priority 
Customer complex order rebates for all net zero complex orders, 
regardless of whether the order is entered on behalf of originating 
market participants that execute a specified ADV of net zero complex 
orders.
    Priority Customer complex orders are typically eligible for tiered 
rebates that range from $0.26 per contract (i.e., for Tier 1) to $0.49 
per contract (i.e., for Tier 8) depending on the member's Priority 
Customer Complex ADV. Pursuant to the provision described above, 
however, the Exchange does not provide these rebates for net zero 
complex orders entered on behalf of originating market participants 
that execute a significant ADV of these orders in a given month. This 
provision is designed to prevent members from engaging in rebate 
arbitrage by entering essentially valueless complex orders solely to 
recover rebates. While net zero 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 
or other market participants on the individual legs who pay a fee to 
trade with this order flow. Market Makers have continued to express 
concerns about trading against net zero complex orders that leg into 
the regular market, as offending firms modify their behavior to stay 
within the ADV requirements set by the Exchange. These Market Makers 
have indicated that continued interaction with these economically 
valueless orders impedes their ability to provide liquidity on the 
Exchange as they are charged to trade against these net zero complex 
orders when they leg into the regular market and execute against their 
quotes.
    The Exchange believes that it is in the interest of a fair and 
orderly market to provide appropriate incentives for Market Makers to 
maintain quality markets. As a result, the Exchange has instituted 
several programs that are aimed at incentivizing Market Makers to 
provide liquidity, including, for example, the Market Maker Plus 
program, which rewards Market Makers for routinely quoting at the 
national best bid or offer.\7\ Despite the Exchange's efforts to date, 
market participants have continued to enter valueless net zero complex 
orders and may earn rebates for those orders if they stay within the 
ADV threshold described in the rule. In particular, today, market 
participants can reduce their ADV in net zero complex orders and/or 
split their net zero order flow across multiple originating market 
participants to stay within the ADV thresholds set by the Exchange, and 
thereby qualify for Priority Customer complex order rebates. The 
Exchange believes that it is appropriate at this time to completely 
remove incentives for trading net zero complex orders by eliminating 
the current ADV threshold. With this proposed change, all net zero 
complex orders will be ineligible for Priority Customer complex order 
rebates. Eliminating the ADV requirement will discourage market 
participants from engaging in this economically valueless conduct, 
which impedes Market Makers' ability to maintain quality markets, as no 
net zero complex orders will be rebate eligible. Priority Customer 
complex orders that do not meet the definition of a net zero complex 
order will continue to receive rebates based on the tier achieved.
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    \7\ See ISE Schedule of Fees, Section I., Regular Order Fees and 
Rebates.
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    In addition, the Exchange proposes to reduce the fee charged to 
Market Makers and Non-Nasdaq ISE Market Makers for Regular Orders in 
Select Symbols when trading against Priority Customer complex orders 
that leg into the regular book. Currently, Market Makers (including 
Market Makers that qualify for Market Maker Plus) \8\ and Non-Nasdaq 
ISE Market Makers are charged a maker fee of $0.30 per contract for 
Regular Orders in Select Symbols when trading against Priority Customer 
complex orders that leg into the regular order book.\9\ This higher 
maker fee was originally adopted because the Exchange pays a rebate to 
Priority Customer complex orders that leg into the regular order book. 
With the changes described above, the Exchange believes that it is 
appropriate to revisit this fee, and now proposes to reduce the fee to 
$0.10 per contract. This change will reduce disincentives for Market 
Makers

[[Page 37968]]

to provide liquidity to the benefit of all market participants that 
trade on the Exchange.\10\
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    \8\ A Market Maker Plus is a Market Maker who is on the National 
Best Bid or National Best Offer a specified percentage of the time 
for series trading between $0.03 and $3.00 (for options whose 
underlying stock's previous trading day's last sale price was less 
than or equal to $100) and between $0.10 and $3.00 (for options 
whose underlying stock's previous trading day's last sale price was 
greater than $100) in premium in each of the front two expiration 
months. The specified percentage is at least 80% but lower than 85% 
of the time for Tier 1, at least 85% but lower than 95% of the time 
for Tier 2, and at least 95% of the time for Tier 3. A Market 
Maker's single best and single worst quoting days each month based 
on the front two expiration months, on a per symbol basis, will be 
excluded in calculating whether a Market Maker qualifies for this 
rebate, if doing so will qualify a Market Maker for the rebate.
    \9\ Market Makers that qualify for Market Maker Plus are not 
charged a fee or provided a rebate when trading against non-Priority 
Customer complex orders that leg into the regular order book. Other 
Market Makers and Non-Nasdaq ISE Market Makers are charged the 
regular $0.10 per contract fee when trading against non-Priority 
Customer complex orders that leg into the regular order book.
    \10\ With the proposed fee reduction, Market Makers (other than 
those that qualify for Market Maker Plus) and Non-Nasdaq ISE Market 
Makers will be charged a maker fee of $0.10 per contract for Regular 
Orders in Select Symbols regardless of the order on the other side 
of the trade. The Exchange therefore proposes to effectuate this 
change by deleting footnote 11.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\11\ in general, and 
Section 6(b)(4) of the Act,\12\ 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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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that it is reasonable and equitable to remove 
the ADV threshold from the net zero provision in the Schedule of Fees 
as this change 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. With 
the current provision, offending firms have repeatedly found ways to 
continue to submit these economically valueless orders to the detriment 
of the Exchange and market participants that trade on the Exchange. The 
continued submission of these net zero complex orders by a handful of 
market participants 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 eliminating the ADV threshold will take away 
the incentives for firms to continue to enter net zero complex orders 
purely to earn a rebate, thereby reducing the cost of these trades to 
the Exchange and its members.
    Market Makers may be impeded in providing liquidity when doing so 
may result in trading against these net zero complex orders that leg 
into the regular market. The Exchange believes that it is important 
that Market Makers be properly incentivized to maintain quality 
markets, and is therefore proposing to take steps to eliminate the 
incentives for market participants to enter net zero complex orders. 
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 eliminating the ADV requirement in this 
provision will discourage market participants from entering valueless 
net zero complex orders, which are entered for the sole purpose of 
earning a rebate. As a result, the Exchange believes that Market Makers 
will be aided in their role of providing liquidity and maintaining 
quality markets to the benefit of all market participants that trade on 
the Exchange.
    Furthermore, the Exchange believes that the proposed 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, regardless 
of their ADV in this activity. Thus, all market participants that enter 
net zero complex orders will be uniformly denied rebates for those 
orders. To the extent that those market participants execute non-net 
zero complex orders, however, they will continue to receive Priority 
Customer complex order rebates based on their ADV in that activity. The 
Exchange does not believe that it is unfairly discriminatory to 
eliminate the ADV threshold for net zero complex orders since the 
elimination of this threshold means that no market participants will 
receive rebates for these orders.
    The Exchange also believes that it is reasonable and equitable 
reduce the maker fee charged to Market Makers and Non-Nasdaq ISE Market 
Makers for Regular Orders in Select Symbols when trading against 
Priority Customer complex orders that leg into the regular order book. 
With the changes described above related to net zero complex orders, 
which will eliminate rebates for certain Priority Customer complex 
orders that leg in to the regular order book, the Exchange believes 
that it is appropriate to also reduce the amount charged to Market 
Makers when trading against such Priority Customer complex orders in 
the regular order book. Furthermore, the Exchange believes that 
reducing the fee charged to Market Makers and Non-Nasdaq ISE Makers 
when trading against Priority Customer complex order that leg into the 
regular order book will increase incentives for those firms to provide 
liquidity to the benefit of all market participants that trade on the 
Exchange. The Exchange does not believe that this change is unfairly 
discriminatory as the same $0.10 per contract maker fee applies to 
Market Makers (other than those that qualify for Market Maker Plus) and 
Non-Nasdaq ISE Market Makers when trading against other orders in these 
symbols, and is also the same as the maker fees charged to Firm 
Proprietary,\13\ Broker-Dealer,\14\ and Professional Customer 
orders.\15\
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    \13\ A ``Firm Proprietary'' order is an order submitted by a 
member for its own proprietary account.
    \14\ A ``Broker-Dealer'' order is an order submitted by a member 
for a broker-dealer account that is not its own proprietary account.
    \15\ A ``Professional Customer'' is a person or entity that is 
not a broker/dealer and is not a Priority Customer.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\16\ 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 eliminating 
the ADV requirement applicable to the Exchange's net zero complex order 
provision in the Schedule of Fees, 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. 
Rather than impede competition, the Exchange believes that this change 
will enhance competition by enabling Market Makers to step up and 
maintain quality markets to the benefit of all market participants that 
trade on the Exchange. In addition, the reduction of Market Maker and 
Non-Nasdaq ISE Market Maker fees for trading against Priority Customer 
complex orders that leg into the regular order book will also further 
competition as the fees are consistent with those charged to other 
market participants. 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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    \16\ 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.

[[Page 37969]]

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,\17\ and Rule 19b-4(f)(2) \18\ 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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    \17\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \18\ 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-2017-77 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-2017-77. 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-2017-77 and should be 
submitted on or before September 5, 2017.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-17065 Filed 8-11-17; 8:45 am]
 BILLING CODE 8011-01-P