[Federal Register Volume 83, Number 238 (Wednesday, December 12, 2018)]
[Notices]
[Pages 63955-63958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26826]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84729; File No. SR-ISE-2018-96]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Relating to Bid/Ask
Differentials
December 6, 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 November 28, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``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 ISE Rule 701, entitled ``Opening,''
ISE Rule 803, entitled ``Obligations of Market Makers'' and ISE Rule
100, entitled ``Definitions.''
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
ISE proposes several amendments in this rule change. First, the
Exchange proposes to amend ISE Rule 701, entitled ``Opening'' and ISE
Rule 803, entitled ``Obligations of Market Makers'' to correct
inconsistencies between the Exchange's rule text and the operation of
the System. Second, the Exchange proposes to add definitions to ISE
Rule 100 to define ``in-the-money'' and ``out-of-the-money'' option
series. Third, the Exchange proposes to correct various cross
references to Rule 100. Each amendment will be described in more detail
below.
Rule 701
Today, for the Opening Process, ISE Rule 701(a)(8) defines a
``Valid Width Quote'' as a two-sided electronic quotation submitted by
a Market Maker that consists of a bid/ask differential that is
compliant with Rule 803(b)(4).\3\
[[Page 63956]]
Specifically, for the Opening Process, ISE Rule 803(b)(4) states that,
for in-the money option series, the bid/ask differential may be as wide
as the spread between the national best bid and offer in the underlying
security. In practice, however, the Exchange's System permits a Valid
Width Quote in the Opening Process to be as wide as the quotation for
the underlying security on the primary (listing) market.\4\
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\3\ ISE Rule 803(b)(4) provides:
``To price options contracts fairly by, among other things,
bidding and offering so as to create differences of no more than $5
between the bid and offer following the opening rotation in an
equity or index options contract. Prior to the opening rotation,
spread differentials shall be no more than $.25 between the bid and
offer for each options contract for which the bid is less than $2,
no more than $.40 where the bid is at least $2 but does not exceed
$5, no more than $.50 where the bid is more than $5 but does not
exceed $10, no more than $.80 where the bid is more than $10 but
does not exceed $20, and no more than $1 where the bid is $20 or
greater, provided that the Exchange may establish differences other
than the above for one or more options series.
(i) The bid/offer differentials stated in subparagraph (b)(4) of
this Rule shall not apply to in-the-money options series where the
underlying securities market is wider than the differentials set
forth above. For these series, the bid/ask differential may be as
wide as the spread between the national best bid and offer in the
underlying security.''
\4\ In connection with the ISE migration, the primary market was
utilized beginning on June 12, 2017 as each symbol migrated to the
INET platform.
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Proposal
The Exchange proposes to codify its current practice and correctly
reflect in its Rules that the Valid Width Quote in the Opening Process
apply a primary market analysis, not a national best bid or offer
(``NBBO'') analysis.\5\ Specifically, this proposal would conform the
current rule text to the current System by amending the definition of a
Valid Width Quote in Rule 701, ``Opening,'' so that, in the case of in-
the-money option series \6\ where the market for the underlying
security is wider than the differentials set forth within ISE Rule
803(b)(4), the bid/ask differential may be as wide as the quotation for
the underlying security on the primary \7\ (listing) market, or its
decimal equivalent rounded down to the nearest minimum increment.
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\5\ The Exchange notes that today ISE utilizes the primary
market in calculating the bid/ask differential during the Opening
Process. This rule change would amend the rule to reflect ISE's
current practice.
\6\ An at-the-money option series would also qualify. An out-of-
the-money series would not qualify.
\7\ The term ``primary market'' means the principal market in
which an underlying security is traded. See ISE Rule 100(a)(48).
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The Exchange believes that utilizing the primary market in the
Opening Process is reasonable given the close connection between the
primary market and the Opening Process. For example, ISE Rule 701(c)(2)
provides, ``For all options, the underlying security, including
indexes, must be open on the primary market for a certain time period
as determined by the Exchange for the Opening Process to commence. The
time period shall be no less than 100 milliseconds and no more than 5
seconds.''
Today, in order to open, the Exchange requires either: (i) The
Primary Market Maker's (``PMM'') Valid Width Quote; (ii) the Valid
Width Quotes of at least two Competitive Market Makers (``CMM''); or
(iii) if neither the PMM's Valid Width Quote nor the Valid Width Quotes
of two CMMs have been submitted within such timeframe, one CMM has
submitted a Valid Width Quote. The Exchange notes that it requires
Market Makers to submit Valid Width Quotes during the Opening Process
to guarantee liquidity, unlike other markets which may not require
market makers to quote during the opening.\8\ Further, amending the
rule text to conform to its current practice will avoid confusion and
continue to permit ISE to remain one of the strongest openings in the
industry.
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\8\ The Nasdaq Options Market (``NOM'') does not require NOM
Market Makers to quote during the opening, however if a NOM Market
Maker decided to quote during the opening, the Market Maker would be
permitted to submit a bid/ask differential with a difference not to
exceed $5 between the bid and offer regardless of the price of the
bid. However, respecting in-the-money series where the market for
the underlying security is wider than $5, the bid/ask differential
may be as wide as the spread between the national best bid and offer
in the underlying security. See NOM Rules at Chapter VII, Section
6(d)(ii).
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Discretion
The Exchange proposes to codify its current practice and amend ISE
Rule 803(b)(4) to adopt rule text which permits the Exchange intra-day
discretion for bid/ask differentials similar to the discretion
currently permitted in the Opening Process. The Exchange proposes to
add a sentence to the end of the paragraph in ISE Rule 803(b)(4)
indicating the Exchange may establish differences other than the above
for one or more series or classes of options. The Exchange notes that
it utilizes this discretion today to grant relief for individual
options classes as well as relief for all option classes based upon
specific criteria. Today, Market Makers may request quote relief. When
determining whether to grant quote relief the Exchange considers, among
other factors, the following: (i) Pending corporate actions with
undisclosed or uncertain terms; (ii) company or industry news with
anticipated significant market impact; (iii) government news of a
sensational nature. The Exchange believes that it is necessary to grant
quote relief in certain circumstances where a Market Maker may not have
enough information to maintain fair and orderly markets. The Exchange
notes that other markets have similar discretion for intra-day quotes
today.\9\
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\9\ See Nasdaq Phlx LLC Rule 1014(c)(i)(A)(1)(a), Miami
International Securities Exchange LLC Rule 604b)(4), Cboe Exchange,
Inc. Rule 8.7(d), NYSE American LLC Rule 925NY(b)(4), NYSE Arca,
Inc. 6.37-O(b)(4).
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Rule 100
ISE rules currently do not define an ``in-the-money'' or ``out-of-
the-money'' option series. As part of this rule change, the Exchange
proposes to define these above-referenced terms within ISE Rule 100 to
bring greater transparency to its rules with respect to Market Maker
quoting. The Exchange proposes to define the term ``in-the-money''
option at Rule 100(a)(28), which is currently reserved, as the
following: For call options, all strike prices at or below the offer in
the underlying security on the primary listing market; for put options,
all strike prices at or above the bid in the underlying security on the
primary listing market. The Exchange proposes to define an ``out-of-
the-money'' option at Rule 100(a)(40), which is currently reserved, to
mean the following: For call options, all strike prices above the offer
in the underlying security on the primary listing market; for put
options, all strike prices below the bid in the underlying security on
the primary listing market.\10\ Each of these definitions would apply
for purposes of Market Maker quoting obligations in Rules 701 and 803.
The Exchange notes that it specifically proposes to reference the rules
related to Market Maker quoting obligations to avoid any confusion with
the manner in which ``in-the-money'' and ``out-of-the-money'' options
series are defined for purposes of other options rules.
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\10\ The Exchange notes that it does not utilize a last sale
calculation. The Exchange believes that the quotation for the
underlying security on the primary market provides an accurate
reflection of the market. A last sale calculation may not be an
accurate reflection of the market because the last sale may not be
representative of the primary market in all cases, particularly if a
halt were to occur.
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The Exchange has added these definitions into the existing rules in
alphabetical order. The Exchange proposes to renumber the rules to
account for the addition of these two new definitions and proposes to
amend cross-references to Rule 100 within the Rulebook to reflect the
proposed new numbering within Rule 100.
Cross References
The Exchange proposes to amend cross-references to Rule 100 in
Rules 713, 720 and Rule 1901 to refer to the current definitions.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\11\ in general, and furthers the
[[Page 63957]]
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 notes that today ISE
utilizes the primary market in calculating the bid/ask differential
during the Opening Process, although the current rule does not reflect
this practice. This rule change would amend the rule to reflect ISE's
current practice.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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Rules 701 and 803
The Exchange's proposal to amend the Opening Process to conform to
current practice is consistent with the Act because while the Exchange
believes that relying on the primary market or the NBBO accurately
reflect the current trading environment and take into consideration
market conditions, the Exchange's current Opening Process is designed
to utilize the primary standard during the Opening Process.\13\
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\13\ ISE Rule 701(c)(2) provides, ``For all options, the
underlying security, including indexes, must be open on the primary
market for a certain time period as determined by the Exchange for
the Opening Process to commence. The time period shall be no less
than 100 milliseconds and no more than 5 seconds.''.''
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Discretion
The Exchange's proposal to amend its rule to permit intra-day
discretion to conform to current practice is consistent with the Act
because such discretion is necessary to permit the Exchange the ability
to attract liquidity from Market Makers while also maintaining a fair
and orderly market. Market Makers accept a certain amount of risk when
quoting on the Exchange. The Exchange imposes quoting and other
obligations on Market Makers.\14\ The Exchange notes that these risks
which Market Makers accept each trading day are calculated risks. The
Exchange notes that it considers certain factors, which are likely
unforeseen, in determining whether to grant relief either in individual
options classes or for all option classes based upon specific criteria.
Specifically, the Exchange considers, among other factors, the
following: (i) Pending corporate actions with undisclosed or uncertain
terms; (ii) company or industry news with anticipated significant
market impact; (iii) government news of a sensational nature. The
Exchange believes that it is necessary to grant quote relief in certain
circumstances where a Market Maker may not have enough information to
maintain fair and orderly markets. The Exchange notes that other
markets have similar discretion for intra-day quotes today.\15\
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\14\ See ISE Rules 803 and 804.
\15\ See note 9 above.
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Rule 100
The Exchange's proposal to define the terms ``in-the-money'' and
``out-of-the-money'' for purposes of Market Maker quoting obligations
in Rules 701 and 803 is consistent with the Act and protects investors
and the public interest by bringing greater transparency to the
Rulebook. Each of these defined terms would apply for purposes of
Market Maker quoting obligations in Rules 701 and 803. The Exchange
notes that it specifically proposes to reference the rules related to
Market Maker quoting obligations to avoid any confusion with the manner
in which ``in-the-money'' and ``out-of-the-money'' options series are
defined for purposes of other options rules.
Cross-References
The Exchange's proposal to amend cross-references to Rule 100
within Rules 713, 720 and Rule 1901 to refer to the current definitions
is consistent with the Act because it will correct references to
definitions.
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.
Rules 701 and 803
The Exchange's proposal to codify its current practice of utilizing
the primary market in the Opening Process does not unduly burden
competition because the current practice maintains a close connection
between the primary market and the Opening Process. The primary market
reflects the current trading environment. The Exchange notes that the
proposal does not create an undue burden on intra-market competition
because Market Makers are the only market participants subject to
quoting requirements and these participants have valuable information
with respect to the underlying instrument under the current process to
make informed decisions and take calculated risks in the marketplace
when providing liquidity. Market Makers remain responsible for
maintaining fair and orderly markets.
Discretion
The Exchange's proposal to codify the Exchange's ability to permit
intra-day discretion similar to the discretion currently permitted in
the Opening Process does not impose an undue burden on competition
because Market Makers are the only market participants subject to
quoting requirements and the proposal specifically considers the need
for Market Makers to have information to make informed decisions to
make calculated risks in the marketplace so that they may provide
liquidity while maintaining fair and orderly markets. The proposed
amendments do not create undue burdens on inter-market competition
because other options markets have the same intra-day requirements.\16\
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\16\ See note 9 above.
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Rule 100
The Exchange's proposal to define the terms ``in-the-money'' or
``out-of-the-money'' for purposes of Market Maker quoting obligations
in Rules 701 and 803 does not unduly burden competition, rather it adds
greater transparency to the Rulebook and makes clear the applicability
of the definitions to avoid confusion with respect to the remainder of
the options rules.
Cross-References
The Exchange's proposal to amend cross-references to Rule 100 in
Rules 713, 720 and Rule 1901 to refer to the current definitions does
not unduly burden competition because it will correct references to
definitions.
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 \17\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\18\
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\17\ 15 U.S.C. 78s(b)(3)(A)(iii).
\18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and the text of 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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[[Page 63958]]
A proposed rule change filed under Rule 19b-4(f)(6) \19\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii)\20\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Exchange states that
immediately codifying its current practice within its rules to
accurately reflect the operation of the Exchange's System will avoid
confusion. The Commission believes that waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest. Accordingly, the Commission hereby waives the operative delay
and designates the proposed rule change as operative upon filing.\21\
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\19\ 17 CFR 240.19b-4(f)(6).
\20\ 17 CFR 240.19b-4(f)(6)(iii).
\21\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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. 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-2018-96 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-2018-96. 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 10:00 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-2018-96 and should be submitted on
or before January 2, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26826 Filed 12-11-18; 8:45 am]
BILLING CODE 8011-01-P