[Federal Register Volume 83, Number 100 (Wednesday, May 23, 2018)]
[Notices]
[Pages 23966-23968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10978]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83278; File No. SR-ISE-2018-16]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Introduce the 
ATR Protection for Orders That Are Routed to Away Markets

May 17, 2018.

I. Introduction

    On February 23, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') 
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 
amend Exchange Rule 714 regarding the Acceptable Trade Range (``ATR'') 
functionality for orders that are routed to away markets. The proposed 
rule change was published for comment in the Federal Register on March 
14, 2018.\3\ On April 20, 2018, the Exchange submitted Amendment No. 1 
to the proposed rule change, which replaced and superseded the original 
filing in its entirety.\4\ On April 26, 2018, the Commission extended 
the time period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change to June 22, 
2018.\5\ The Commission received no comments on the proposed rule 
change. The Commission is publishing this notice to solicit comment on 
Amendment No. 1 to the proposed rule change from interested persons and 
is approving the proposed rule change, as modified by Amendment No. 1, 
on an accelerated basis.
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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. 82846 (March 9, 
2018), 83 FR 11254 (``Notice'').
    \4\ See Letter to Brent J. Fields, Secretary, Commission, from 
Adrian Griffiths, Senior Associate General Counsel, Nasdaq, Inc., 
dated April 20, 2018 (``Amendment No. 1''). Amendment No. 1 revises 
the proposed rule change to: (i) Provide further discussion of the 
current application of the ATR to orders routed away; (ii) modify 
the proposed rule text regarding the recalculation of the ATR for 
orders routed away pursuant to Supplementary Material to Exchange 
Rule 1901, if the applicable National Best Bid (``NBB'') or the 
National Best Offer (``NBO'') price is improved at the time of 
routing; (iii) expand the discussion and justification for 
recalculating the ATR for such orders; and (iv) make other 
amendments to the proposed rule text to improve the 
understandability of the current ATR calculation. Amendment No. 1 
was also submitted as a comment to the proposed rule change. 
Amendment No. 1 is available at: https://www.sec.gov/comments/sr-ise-2018-16/ise201816-3483594-162248.pdf.
    \5\ See Securities Exchange Act Release No. 83119 (April 26, 
2018), 83 FR 19367 (May 2, 2018).
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1 \6\
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    \6\ For a more detailed description of the proposal, see Notice, 
supra note 3; Amendment No. 1, supra note 4.
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    The ATR is a functionality designed to prevent the Exchange's 
System \7\ from experiencing dramatic price swings by preventing the 
execution of orders beyond set thresholds.\8\ Pursuant to Exchange Rule 
714(b)(1), the System calculates an ATR to limit the range of prices at 
which an order or quote will be allowed to execute.\9\ Upon receipt of 
a new order or quote, the ATR is calculated by taking the reference 
price, plus or minus a value to be determined by the Exchange, where 
the reference price is the NBB for sell orders/quotes and the NBO for 
buy orders/quotes.\10\ Accordingly, the ATR is: The reference price-(x) 
for sell orders/quotes; and the reference price + (x) for buy 
orders.\11\ If an order or quote reaches the outer limit of the ATR 
without being fully executed, then any unexecuted balance will be 
cancelled.\12\
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    \7\ The term ``System'' means the electronic system operated by 
the Exchange that receives and disseminates quotes, executes orders 
and reports transactions. See Exchange Rule 100(a)(53).
    \8\ See Amendment No. 1, supra note 4.
    \9\ See Exchange Rule 714(b)(1).
    \10\ See Notice, supra note 3, at 11254-55. For purposes of 
determining the value that will be added or subtracted from the 
reference price, there are three categories of options for the ATR: 
(1) Penny Pilot Options trading in one cent increments for options 
trading at less than $3.00 and increments of five cents for options 
trading at $3.00 or more, (2) Penny Pilot Options trading in one-
cent increments for all prices, and (3) Non-Penny Pilot Options. See 
id.
    \11\ See Exchange Rule 714(b)(1)(i).
    \12\ See Exchange Rule 714(b)(1)(ii). The ATR is not available 
for All-or-None Orders or Complex Orders that leg into the regular 
order book. See Notice, supra note 3, at 11254, n.3.

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[[Page 23967]]

    The Exchange states that, currently, the System calculates a 
reference price for an incoming order or quote only when that order or 
quote rests or trades on the regular order book.\13\ Accordingly, 
orders that route to away exchanges do not always receive the ATR. 
Orders that first trade on the Exchange prior to being routed away 
receive the ATR, but orders that are routed away upon entry (or 
otherwise do not rest or trade on the regular order book) are not 
currently subject to the ATR.\14\
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    \13\ See Notice, supra note 3, at 11255.
    \14\ See Amendment No. 1, supra note 4.
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    The Exchange now proposes to amend the ATR to modify how it applies 
to orders that are routed by the Exchange. First, the Exchange proposes 
to apply the ATR to orders that are routed to away markets without 
first trading on the Exchange.\15\ This means that, unlike today, the 
System will calculate an ATR for orders even if the order does not rest 
or trade on the regular order book prior to being routed.\16\
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    \15\ See Notice, supra note 3, at 11255.
    \16\ See Amendment No. 1, supra note 4.
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    In addition, the Exchange proposes that, for orders routed to away 
markets pursuant to the Supplementary Material to Exchange Rule 
1901,\17\ if the applicable NBB or NBO price is improved at the time 
the order is routed, a new ATR would be calculated based on the 
reference price at that time.\18\ The Exchange notes that the NBB or 
NBO price for a security may change during the ``Flash'' auction 
process described in Supplementary Material .02 to Rule 1901, and the 
proposed rule change would provide additional protection if the 
reference price was improved at the time the order is routed.\19\ 
Similarly, the Exchange represents that other routable orders not 
subject to the ``Flash'' auction process must still be processed by the 
System prior to routing, and during this processing time the market may 
have moved.\20\ Under the proposed rule change, if the NBB or NBO price 
has not improved at the time an order is routed, the ATR that was 
applied to the order upon entry into the System would apply.\21\
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    \17\ This could occur: (1) If an order is routed to an away 
market pursuant to Supplementary Material .02 to Rule 1901 (the 
``Flash'' auction) without first trading against any Exchange 
interest in the ``Flash'' auction; (2) if an order is a ``Sweep 
Order'' as defined in Rule 715(s) and processed pursuant to 
Supplementary Material .05 to Rule 1901 instead of the ``Flash'' 
auction; or (3) if a Non-Customer Order opts out of the ``Flash'' 
auction and is processed pursuant to Supplementary Material .04 to 
Rule 1901. See Amendment No. 1, supra note 4.
    Supplementary Material .02 to Rule 1901 provides that orders to 
be routed to away markets may be eligible for a ``Flash'' auction 
wherein Exchange members are allowed the opportunity to enter 
responses to trade with the order prior to routing. See Notice, 
supra note 3, at 11255.
    \18\ See Amendment No. 1, supra note 4; proposed Exchange Rule 
714(b)(1)(ii). In the Notice, the Exchange provides examples of how 
the ATR will be applied to orders routed to away markets. See 
Notice, supra note 3, at 11255.
    \19\ See Amendment No. 1, supra note 4.
    \20\ See Amendment No. 1, supra note 4.
    \21\ The Exchange states that the ATR is not again recalculated 
for orders after routing, so orders that are routed but not executed 
in full by an away market, and subsequently return to trade on the 
Exchange, would not receive a new ATR. See Amendment No. 1, supra 
note 4.
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    The Exchange states that it intends to implement the ATR 
functionality described in the proposed rule change no later than 
October 31, 2018.\22\
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    \22\ See Notice, supra note 3, at 11255. The Exchange further 
states that it will announce the implementation date of this 
functionality in an Options Trader Alert prior to the launch date. 
See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\23\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\24\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, 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.
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    \23\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \24\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the ATR is reasonably designed to 
prevent executions of orders and quotes at prices that are 
significantly worse than the NBBO at the time of an order's submission 
and may reduce the potential negative impacts of unanticipated 
volatility in individual options.\25\ The Commission notes that the 
proposed rule change extends the application of the ATR to orders that 
route away immediately upon entry, thus offering these orders the same 
protections that the ATR provides to orders that first trade on the 
Exchange before being routed. The Commission also believes that 
recalculating the ATR for orders routed to away markets pursuant to the 
Supplementary Material to Rule 1901, if the applicable NBB or NBO price 
is improved at the time the order is routed, should help provide such 
orders with a price protection that better reflects the NBB or NBO. The 
Commission further believes that the proposed rule change will provide 
transparency and enhance investors' understanding of the operation of 
the ATR. The Commission notes that the Exchange will continue to use 
the NBB or NBO as the reference price for the ATR. For these reasons, 
the Commission believes that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the Act.
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    \25\ See Securities Exchange Act Release No. 80432 (April 11, 
2017), 82 FR 18191, 18193-94 (April 17, 2018) (SR-ISE-2017-03) 
(Order approving, among other things, proposal to establish ATR).
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III. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to the proposed rule change is consistent with the Exchange 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-2018-16 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-2018-16. 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 website (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

[[Page 23968]]

public in accordance with the provisions of 5 U.S.C. 552, will be 
available for website 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. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-ISE-
2018-16 and should be submitted on or before June 13, 2018.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of notice of Amendment No. 1 in the Federal 
Register. As discussed above, Amendment No. 1 adds detail to the 
proposal and the proposed rule text regarding the operation of the ATR. 
Amendment No. 1 revises the proposed rule text to specify that for 
orders routed to away markets pursuant to the Supplementary Material to 
Rule 1901, if the applicable NBB or NBO price is improved at the time 
the order is routed, a new ATR will be calculated based on the 
reference price at that time. Amendment No. 1 also sets forth 
additional justification for the proposed rule change. The Commission 
believes that these revisions provide greater clarity with respect to 
the current and proposed application of the ATR for routed away orders. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Exchange Act,\26\ to approve the proposed rule change, 
as modified by Amendment No. 1 on an accelerated basis.
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    \26\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\27\ that the proposed rule change (SR-ISE-2018-16), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved on 
an accelerated basis.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10978 Filed 5-22-18; 8:45 am]
 BILLING CODE 8011-01-P