[Federal Register Volume 83, Number 176 (Tuesday, September 11, 2018)]
[Notices]
[Pages 45997-46000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19642]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84035; File No. SR-ISE-2018-76]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Exchange's Schedule of Fees To Permit Certain Affiliated Market 
Participants To Aggregate Volume and Qualify for Various Pricing 
Incentives

September 5, 2018.
    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 24, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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 to amend the Exchange's Schedule of Fees to 
permit certain affiliated market participants to aggregate volume and 
qualify for various pricing incentives.
    The text of the proposed rule change is available on the Exchange's 
website at http://ise.cchwallstreet.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 to permit certain 
affiliated market participants to aggregate volume and qualify for 
various pricing incentives. Specifically, the Exchange proposes to 
permit Affiliated Entities to aggregate their Complex Order volume for 
purposes of calculating Priority Customer Rebates in Section II of the 
Schedule of Fees.
Preface
    The Exchange is proposing to add the following new defined terms to 
the Preface of the Schedule of Fees, ``Affiliated Entity,'' ``Appointed 
Market Maker,'' ``Appointed OFP,'' and ``Order Flow Provider.'' The 
Exchange also proposes to alphabetize the current definitions.
Affiliated Entity
    The term ``Appointed Market Maker'' is proposed to be defined as a 
Market Maker who has been appointed by an Order Flow Provider (``OFP'') 
for purposes of qualifying as an Affiliated Entity. An OFP is 
separately proposed to be defined as any Member, other than a Market 
Maker, that submits orders, as agent or principal, to the Exchange.\3\ 
The Exchange proposes to define the term ``Appointed OFP'' as an OFP 
who has been appointed by a Market Maker for purposes of qualifying as 
an Affiliated Entity. The Exchange proposes to define the term 
``Affiliated Entity'' as a relationship between an Appointed Market 
Maker and an Appointed OFP for purposes of qualifying for certain 
pricing as specified in the Schedule of Fees. In order to become an 
Affiliated Entity,

[[Page 45998]]

Market Makers and OFPs will be required to send an email to the 
Exchange to appoint their counterpart, at least 3 business days prior 
to the last day of the month to qualify for the next month.\4\ For 
example, with this proposal, market participants may submit emails \5\ 
to the Exchange to become Affiliated Entities to qualify for discounted 
pricing starting September 1, 2018, provided the emails are sent at 
least 3 business days prior to the first business day of September 
2018. The Exchange will acknowledge receipt of the emails and specify 
the date the Affiliated Entity would qualify for applicable pricing, as 
specified in the Schedule of Fees. Each Affiliated Entity relationship 
will commence on the 1st of a month and may not be terminated prior to 
the end of any month. An Affiliated Entity relationship will terminate 
after a one (1) year period, unless either party terminates earlier in 
writing by sending an email \6\ to the Exchange at least 3 business 
days prior to the last day of the month to terminate for the next 
month. Affiliated Entity relationships must be renewed annually. For 
example, if the start date of the Affiliated Entity relationship is 
September 1, 2018, the counterparties may determine to commence a new 
relationship as of September 1, 2019 by requiring each party to send a 
new email by August 28, 2019 (3 business days prior to the end of the 
month). Affiliated Members \7\ may not qualify as a counterparty 
comprising an Affiliated Entity. Each Member may qualify for only one 
(1) Affiliated Entity relationship at any given time. As proposed, an 
Affiliated Entity shall be eligible to aggregate their volume for 
purposes of qualifying for certain pricing specified in the Schedule of 
Fees, as described below.
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    \3\ Market Makers shall not be considered Appointed OFPs for the 
purpose of becoming an Affiliated Entity.
    \4\ The Exchange shall issue an Options Trader Alert specifying 
the email address and details required to apply to become an 
Affiliated Entity.
    \5\ Emails shall be submitted to [email protected].
    \6\ Id.
    \7\ An ``Affiliated Member'' is a Member that shares at least 
75% common ownership with a particular Member as reflected on the 
Member's Form BD, Schedule A. See Preface to Schedule of Fees.
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Section II--Priority Customer Rebates
    The Exchange proposes to amend Section II, entitled ``Complex Order 
Fees and Rebates'' to permit Affiliated Entities to aggregate their 
Complex Order volume for purposes of calculating Priority Customer 
Rebates. Currently Section II pays rebates \8\ to Priority Customer 
Complex Orders in Select Symbols \9\ and Non-Select Symbols.\10\ Today, 
all Complex Order volume executed on the Exchange, including volume 
executed by Affiliated Members, is included in the volume calculation, 
except for volume executed as Crossing Orders and Responses to Crossing 
Orders. Currently, there are nine Priority Customer Complex Order Tiers 
based on the percentage of industry volume calculation:
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    \8\ Rebates are provided per contract per leg if the order 
trades with non-Priority Customer orders in the Complex Order Book 
or trades with quotes and orders on the regular order book. Customer 
Complex Order rebates are paid a rebate based on a percentage of 
industry volume. Priority Customer Complex Tiers are based on Total 
Affiliated Member Complex Order Volume (excluding Crossing Orders 
and Responses to Crossing Orders) and are calculated as a percentage 
of Customer Total Consolidated Volume. ``Customer Total Consolidated 
Volume'' means the total national volume cleared at The Options 
Clearing Corporation in the Customer range in equity and ETF options 
in that month.
    \9\ ``Select Symbols'' are options overlying all symbols listed 
on the Nasdaq ISE that are in the Penny Pilot Program.
    \10\ ``Non-Select Symbols'' are options overlying all symbols 
excluding Select Symbols. For Non-Select Symbols, no rebates will be 
paid for orders in NDX, NQX and MNX.

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Tier 1...................................  0.000%-0.200%....................           ($0.25)           ($0.40)
Tier 2...................................  Above 0.200-0.400................            (0.30)            (0.55)
Tier 3...................................  Above 0.400-0.600................            (0.35)            (0.70)
Tier 4...................................  Above 0.600-0.750................            (0.40)            (0.75)
Tier 5...................................  Above 0.750-1.000................            (0.45)            (0.80)
Tier 6...................................  Above 1.000-1.500................            (0.46)            (0.80)
Tier 7...................................  Above 1.500-2.000................            (0.48)            (0.80)
Tier 8...................................  Above 2.000-3.250................            (0.50)            (0.85)
Tier 9...................................  Above 3.250......................            (0.50)            (0.85)
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    The Exchange proposes to incentivize certain Members, who are not 
Affiliated Members, to enter into an Affiliated Entity relationship for 
the purpose of aggregating Complex Order volume to qualify for Section 
II, Priority Customer Rebates. The Exchange proposes to add a sentence 
to note 16 within Section II of the Schedule of Fees to provide, 
``Affiliated Entities may aggregate their Complex Order volume for 
purposes of calculating Priority Customer Rebates. The Appointed OFP 
would receive the rebate associated with the qualifying volume tier 
based on aggregated volume.''
    By aggregating volume, the Affiliated OFP, who submits Priority 
Customer order volume, is offered an opportunity to qualify for higher 
rebates, thereby lowering costs and encouraging Members to send more 
order flow. Priority Customer liquidity benefits all market 
participants by providing more order flow to the marketplace and more 
trading opportunities. Affiliated Members are not eligible to enter an 
Affiliated Entity relationship.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Schedule of 
Fees is consistent with Section 6(b) of the Act,\11\ in general, and 
furthers the objectives of Section 6(b)(4) and (b)(5) of the Act,\12\ 
in particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using its facilities, and is not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4), (5).
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    The Exchange's proposal to amend the Preface of the Schedule of 
Fees to add the definitions of ``Appointed Market Maker,'' ``Appointed 
OFP,'' ``Order Flow Provider'' and ``Affiliated Entity'' is reasonable 
because the Exchange is proposing to identify the applicable market 
participants that may qualify to aggregate volume as an Affiliated 
Entity. Further the Exchange seeks to make clear the manner in which 
Members may participate on the Exchange as Affiliated Entities by 
setting timeframes for communicating agreements among market 
participants and terms of early termination. The Exchange also clearly 
states that no Affiliated Member may become a counterparty to an 
Affiliated Entity. The Exchange believes that these terms are 
reasonable because Members could elect to become a counterparty to an 
Affiliated Entity, provided they are not Affiliated Members.
    The Exchange's proposal to amend the Preface of the Schedule of 
Fees to

[[Page 45999]]

add the definitions of ``Appointed Market Maker,'' ``Appointed OFP,'' 
``Order Flow Provider'' and ``Affiliated Entity'' is equitable and not 
unfairly discriminatory because all Members that are not Affiliated 
Members may choose to enter into an Affiliated Entity relationship.
    The Exchange also believes that it is reasonable, equitable and not 
unfairly discriminatory to alphabetize the definitions for ease of 
reference.
Section II--Priority Customer Rebates
    The Exchange's proposal to permit Affiliated Entities to aggregate 
Complex Order volume for purposes of qualifying Appointed OFPs for 
Section II Priority Customer Rebates is reasonable because it will 
attract additional Priority Customer order flow to the Exchange. 
Priority Customer liquidity benefits all market participants by 
providing more trading opportunities, which attracts Market Makers. An 
increase in the activity of these market participants in turn 
facilitates tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants. 
Appointed OFPs directing Priority Customer order flow to the Exchange 
may be eligible to qualify for a Priority Customer Rebate or a higher 
Priority Customer Rebate tier, with this proposal, as a result of 
aggregating volume with an Appointed Market Maker and thereby 
qualifying for higher Priority Customer Rebates. Permitting Members to 
aggregate volume for purposes of qualifying the Appointed OFP for 
Section II Priority Customer Rebates may also encourage the 
counterparties that comprise the Affiliated Entities to incentivize 
each other to attract and seek to execute more Priority Customer volume 
on ISE. In turn, market participants would benefit from the increased 
liquidity with which to interact and potentially tighter spreads on 
orders. Overall, incentivizing market participants with increased 
opportunities to earn higher Priority Customer rebates may increase the 
quality of the liquidity available on ISE.
    Paying the Priority Customer Rebate to the Affiliated OFP is 
consistent with the Act because as between the Appointed Market Maker 
and the Appointed OFP, the Appointed OFP would be submitting Priority 
Customer Orders as part of its business model. Appointed Market Makers 
do not typically submit such order flow. The Appointed Market Maker 
does have the opportunity to obtain a low Market Maker Taker Fee for 
Select Symbols of $0.47 per contract as compared to $0.50 per contract 
if the Market Maker qualified for Priority Customer Complex Tier 8 and 
$0.44 per contract for Market Makers that achieve Priority Customer 
Complex Tier 9.
    The Exchange's proposal to permit Affiliated Entities to aggregate 
Complex Order volume for purposes of qualifying Appointed OFPs for 
Section II Priority Customer Rebates is equitable and not unfairly 
discriminatory because all ISE Members, other than Affiliated Members, 
may elect to become an Affiliated Entity as either an Appointed Market 
Maker or an Appointed OFP.\13\ Also, each Member may participate in 
only one Affiliated Entity relationship at a given time, which imposes 
a measure of exclusivity among market participants, allowing each party 
to rely on the other's executed Priority Customer volume on ISE to 
receive a corresponding benefit in terms of a higher rebate. Any market 
participant that by definition is not an Affiliated Member may elect to 
become a counterparty of an Affiliated Entity.
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    \13\ Both Members must elect each other to become an Affiliated 
Entity for one year. Participation is effected by an agreement of 
both parties that have provided proper notification to the Exchange. 
A party may elect to terminate the agreement at any time prior to 
one year.
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    The Exchange's proposal to exclude Affiliated Members from 
qualifying as an Affiliated Entity is reasonable, equitable and not 
unfairly discriminatory because Affiliated Members may aggregate volume 
today for purposes of Section II Priority Customer Rebates.\14\ Also, 
the Exchange will apply all qualifications in a uniform manner when 
approving Affiliated Entities.
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    \14\ See Section II of the Schedule of Fees.
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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 Exchange's proposal to 
amend the Preface of the Pricing Schedule to add the definitions of 
``Appointed Market Maker,'' ``Appointed OFP,'' ``Order Flow Provider'' 
and ``Affiliated Entity'' does not impose an undue burden on 
competition because these definitions apply to all members and member 
organizations uniformly. Alphabetizing the remaining definitions will 
provide ease of reference. The Exchange believes that its proposal does 
not impose any burden on inter-market competition because similar 
programs exist on other markets.\15\
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    \15\ The Nasdaq Options Market LLC, Nasdaq Phlx LLC and Nasdaq 
BX, Inc. have similar programs.
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Section II--Priority Customer Rebates
    In terms of intra-market competition, the Exchange does not believe 
that its proposal to permit counterparties of an Affiliated Entity to 
aggregate Priority Customer volume for purposes of qualifying for 
Section II Priority Customer Rebates imposes an undue burden on intra-
market competition because all ISE Members, other than Affiliated 
Members, may become an Affiliated Entity as either an Appointed Market 
Maker or an Appointed OFP. Also, each ISE Member may participate in 
only one Affiliated Entity relationship at a given time, which imposes 
a measure of exclusivity among market participants, allowing each party 
to rely on the other's executed Priority Customer volume on ISE to 
receive a corresponding benefit in terms of a higher rebate. The 
Exchange will apply all qualifications in a uniform manner to all 
market participants that elect to become counterparties of an 
Affiliated Entity. Any market participant that is by definition an 
Affiliated Member may not become a counterparty of an Affiliated 
Entity.
    Market Makers are valuable market participants that provide 
liquidity in the marketplace and incur costs that other market 
participants do not incur. Market Makers are subject to quoting 
obligations \16\ that do not apply to other market participants. 
Incentivizing these market participants to execute Priority Customer 
volume on ISE may result in tighter spreads. An increase in the 
activity of these market participants in turn facilitates tighter 
spreads, which may cause an additional corresponding increase in order 
flow from other market participants. Appointed OFPs directing order 
flow to the Exchange may be eligible to qualify for a Priority Customer 
Rebate or a higher Priority Customer Rebate tier, with this proposal, 
as a result of aggregating volume with an Appointed Market Maker and 
thereby qualifying for higher Priority Customer Rebates. Permitting 
Members to affiliate for purposes of qualifying for Section II Priority 
Customer Rebates may also encourage the counterparties that comprise 
the Affiliated Entities to incentivize each other to attract and seek 
to execute more Priority Customer volume on ISE.
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    \16\ See ISE Rule 804.
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    The Exchange's proposal to exclude Affiliated Members from becoming 
an Affiliated Entity does not impose and undue burden on intra-market 
competition because Affiliated Members may aggregate volume today for

[[Page 46000]]

purposes of qualifying for Priority Customer Rebates.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\17\ 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).
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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-2018-76 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-2018-76. 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 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 a.m. and 3 
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-2018-76 and should be submitted on 
or before October 2, 2018.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19642 Filed 9-10-18; 8:45 am]
 BILLING CODE 8011-01-P