[Federal Register Volume 84, Number 209 (Tuesday, October 29, 2019)]
[Notices]
[Pages 57908-57911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23547]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87390; File No. SR-ISE-2019-26]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the 
Market Maker Plus Program

October 23, 2019.
    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 October 10, 2019, 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 the Exchange's Market Maker Plus 
program under Options 7, Section 3.
    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 amend the 
qualifications for Market Makers to achieving Market Maker Plus status.
    The Exchange initially filed the proposed pricing changes on 
October 1, 2019 (SR-ISE-2019-25). On October 10, 2019, the Exchange 
withdrew that filing and submitted this filing.
    As set forth in Section 3 of the Pricing Schedule, the Exchange 
operates a Market Maker Plus program for regular orders in Select 
Symbols \3\ that provides the below tiered rebates to Market Makers \4\ 
based on time spent quoting at the National Best Bid or National Best 
Offer (``NBBO''). This program is designed to reward Market Makers that 
contribute to market quality by maintaining tight markets in Select 
Symbols.
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    \3\ ``Select Symbols'' are options overlying all symbols listed 
on the Nasdaq ISE that are in the Penny Pilot Program.
    \4\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See Options 1, 
Section 1(a)(20).
    \5\ To encourage Market Makers to maintain quality markets in 
SPY, QQQ, and IWM in particular, members that maintain tight markets 
in those symbols are eligible for higher regular maker rebates and 
may also be eligible for linked maker rebates, as shown in the table 
above. Specifically, the following symbols are linked for purposes 
of the linked maker rebate: (1) SPY and QQQ, and (2) SPY and IWM. 
Market Makers that qualify for Market Maker Plus Tiers 2-4 above for 
executions in SPY, QQQ, or IWM may be eligible for a linked maker 
rebate in a linked symbol in addition to the regular maker rebate 
for the applicable tier. The linked maker rebate applies to 
executions in SPY, QQQ, or IWM if the Market Maker does not achieve 
the applicable tier in that symbol but achieves the tier (i.e., any 
of Market Maker Plus Tiers 2-4) for any badge/suffix combination in 
the other linked symbol, in which case the higher tier achieved 
applies to both symbols. If a Market Maker would qualify for a 
linked maker rebate in SPY based on the tier achieved in QQQ and the 
tier achieved in IWM then the higher of the two linked maker rebates 
will be applied to SPY. The regular maker rebate will be provided in 
the symbol that qualifies the Market Maker for the higher tier based 
on percentage of time at the NBBO.

       Select Symbols Other Than SPY, QQQ, IWM, AMZN, FB, and NVDA
------------------------------------------------------------------------
      Market Maker Plus tier (specified percentage)        Maker rebate
------------------------------------------------------------------------
Tier 1 (80% to less than 85%)...........................         ($0.15)
Tier 2 (85% to less than 95%)...........................          (0.18)
Tier 3 (95% or greater).................................          (0.22)
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                            SPY, QQQ, and IWM
------------------------------------------------------------------------
    Market Maker Plus tier (specified     Regular  Maker   Linked  Maker
               percentage)                    rebate        rebate \5\
------------------------------------------------------------------------
Tier 1 (70% to less than 80%)...........         ($0.00)             N/A
Tier 2 (80% to less than 85%)...........          (0.18)          (0.15)
Tier 3 (85% to less than 90%)...........          (0.22)          (0.19)
Tier 4 (90% or greater).................          (0.26)          (0.23)
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[[Page 57909]]


                           AMZN, FB, and NVDA
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                                                           Maker rebate
      Market Maker Plus tier (specified percentage)             \6\
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Tier 1 (70% to less than 85%)...........................         ($0.15)
Tier 2 (85% to less than 95%)...........................          (0.18)
Tier 3 (95% or greater).................................          (0.22)
------------------------------------------------------------------------

    Market Makers are evaluated each trading day for the percentage of 
time spent on the NBBO for qualifying series that expire in two 
successive thirty calendar day periods beginning on that trading day. A 
Market Maker Plus is a Market Maker who is on the NBBO a specified 
percentage  of the time on average for the month based on daily 
performance in the qualifying series for each of the two successive 
periods described above. Qualifying series are 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. If a Market Maker 
would qualify for a different Market Maker Plus tier in each of the two 
successive 30 calendar day periods, then the lower of the two Market 
Maker Plus tier rebates shall apply to all contracts.\7\ A Market 
Maker's worst quoting day each month for each of the two successive 
periods described above, on a per symbol basis, is excluded in 
calculating whether a Market Maker qualifies for this rebate.\8\
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    \6\ Market Makers that qualify for Market Maker Plus Tiers 1-3 
above for executions in two out of the three symbols AMZN, FB, or 
NVDA will be eligible for a maker rebate in the third symbol, in 
addition to the maker rebate for the applicable tier in the other 
two symbols. The maker rebate will apply to executions in AMZN, FB, 
or NVDA if the Market Maker does not achieve the applicable tier in 
that symbol but achieves the tier (i.e., any of Market Maker Plus 
Tiers 1-3) for any badge/suffix combination in the other two 
symbols. If a Market Maker would qualify for different Market Maker 
Plus Tiers 1-3 in two symbols, then the lower of the two maker 
rebates will be applied to the third symbol (e.g., Market Maker Plus 
qualification in Tier 1 and Tier 2 across two symbols would earn 
Market Maker Plus Tier 1 in the third symbol). If all three symbols 
separately achieve any of the Market Maker Plus Tiers 1-3, the 
symbol that achieves the tier with the lowest maker rebate will 
instead receive the same maker rebate as the symbol that achieved 
the next lowest tier.
    \7\ Market Makers may enter quotes in a symbol using one or more 
unique, exchange assigned identifiers--i.e., badge/suffix 
combinations. Market Maker Plus status is calculated independently 
based on quotes entered in a symbol for each of the Market Maker's 
badge/suffix combinations, and the highest tier achieved for any 
badge/suffix combination quoting that symbol applies to executions 
across all badge/suffix combinations that the member uses to trade 
in that symbol. Only badge/suffix combinations quoting a minimum of 
ten trading days within the month will be used to determine whether 
the Market Maker Plus status has been met and the specific tier to 
be applied to the Market Maker's performance for that month.
    \8\ In addition, the Exchange may exclude from any member's 
monthly Market Maker Plus tier calculation any Unanticipated Event; 
provided that the Exchange will only remove the day for members that 
would have a lower time at the NBBO for the specified series with 
the day included. See Options 7, Section 1(a)(2) for the definition 
of ``Unanticipated Event.''
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    While the Exchange believes that the Market Maker Plus program has 
been successful overall in encouraging better market quality in Select 
Symbols, the Exchange has also observed that in extremely volatile 
months, Market Makers are less likely to meet the stringent Market 
Maker Plus tier qualifications for that month because they are unable 
to hit the tiers as easily. The Exchange therefore proposes to change 
its Market Maker Plus qualifications to avoid penalizing Market Makers 
that have historically contributed to market quality on the Exchange. 
In particular, the Exchange proposes that a Market Maker who qualifies 
for Market Maker Plus Tiers 2 or higher in at least four of the 
previous six months will be eligible to receive a reduced Tier 2 rebate 
in a given month where the Market Maker does not qualify for any Market 
Maker Plus Tiers.\9\ This rebate will be the applicable Tier 2 rebate 
reduced by $0.08 per contract (i.e., $0.10 per contract for the regular 
maker rebate or $0.07 per contract for the linked maker rebate).
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    \9\ Except in SPY, QQQ, and IWM, if a Market Maker qualifies for 
Market Maker Plus Tier 1 in a given month after qualifying for Tier 
2 or higher in at least four of the previous six months, the Market 
Maker would receive the higher $0.15 per contract Tier 1 rebate for 
that month instead of a reduced Tier 2 rebate of $0.10 per contract. 
Today, the Exchange does not provide any rebates to Market Makers 
for meeting the Market Maker Plus Tier 1 qualifications in SPY, QQQ 
IWM. See Options 7, Section 3, note 5.
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    For example, Market Maker 1 (``MM 1'') meets the SPY Market Maker 
Plus Tier 2 level in all of the previous 6 months. In the current 
month, there is a significant increase in volatility and MM 1 is unable 
to meet the stringent Market Maker Plus requirements within the month. 
With the proposal, MM 1 would receive a reduced rebate of $0.10 per 
contract (i.e., the SPY Tier 2 $0.18 per contract rebate reduced by 
$0.08 per contract) in the current month based on meeting the Market 
Maker Plus Tier 2 qualifications in SPY for at least 4 out of the 
previous six months.
Applicability to and Impact on Participants
    With the proposed changes, the Exchange seeks to avoid penalizing 
historically strong Market Maker Plus program participants in similar 
situations as the one outlined above, thereby easing the burden on 
Market Makers to maintain their Market Maker Plus qualification, which 
ultimately will fortify its Market Maker Plus program. Of course, the 
Market Maker would still need to meet the stringent requirements of the 
applicable Market Maker Plus Tier 2 qualifications \10\ at least four 
of the six previous months in order to glean the benefits of the 
reduced rebate proposed above. The Market Maker would also need to meet 
the rigorous Tier 2 qualifications each month going forward to maintain 
the four-month cushion in order to gather the proposed rebate benefits. 
By fortifying participation in this program, the Exchange believes that 
the proposed changes will continue to encourage Market Makers to post 
tight markets in Select Symbols, thereby improving trading conditions 
for all market participants through narrower bid-ask spreads and 
increased depth of liquidity available at the inside market.
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    \10\ Thus, a Market Maker would need to be on the NBBO at least 
80% of the time (i.e., Tier 2 or higher) for SPY, QQQ, and IWM, and 
at least 85% of the time for all other Select Symbols.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(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 any 
facility, 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) and (5).
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    The Exchange believes that the proposed changes to its Market Maker 
Plus program is reasonable and equitable for several reasons. As a 
threshold matter, the Exchange is

[[Page 57910]]

subject to significant competitive forces in the market for options 
transaction services that constrain its pricing determinations in that 
market. The fact that this market is competitive has long been 
recognized by the courts. In NetCoalition v. Securities and Exchange 
Commission, the D.C. Circuit stated as follows: ``[n]o one disputes 
that competition for order flow is `fierce.' . . . As the SEC 
explained, `[i]n the U.S. national market system, buyers and sellers of 
securities, and the broker-dealers that act as their order-routing 
agents, have a wide range of choices of where to route orders for 
execution'; [and] `no exchange can afford to take its market share 
percentages for granted' because `no exchange possesses a monopoly, 
regulatory or otherwise, in the execution of order flow from broker 
dealers'. . . .'' \13\
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    \13\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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    Numerous indicia demonstrate the competitive nature of this market. 
For example, clear substitutes to the Exchange exist in the market for 
options transaction services. The Exchange is only one of sixteen 
options exchanges to which market participants may direct their order 
flow. Within this environment, market participants can freely and often 
do shift their order flow among the Exchange and competing venues in 
response to changes in their respective pricing schedules.
    Within the foregoing context, the proposal represents a reasonable 
attempt by the Exchange to increase its liquidity and market share 
relative to its competitors. As noted above, the Exchange's proposal is 
intended to fortify participation in the Market Maker Plus program, 
which the Exchange believes has been successful overall in encouraging 
better market quality in Select Symbols. The Exchange believes that 
further encouraging Market Makers to maintain tight markets in Select 
Symbols will increase liquidity and attract additional order flow to 
the Exchange, which benefits all market participants in the quality of 
order interaction.
    In particular, the Exchange's proposal to provide a reduced rebate 
to Market Makers who do not qualify for any Market Maker Plus tiers in 
a given month, but qualified for Market Maker Plus Tier 2 or higher in 
at least four of the previous six months preserves the intent of the 
Market Maker Plus program to reward Market Makers who contribute to 
market quality by maintaining tight markets based on time spent quoting 
at the NBBO. The Exchange proposes to provide the reduced rebate to 
Market Makers that qualified for Market Maker Plus Tier 2 or higher in 
the requisite time period as opposed to Market Maker Plus Tier 1 
because Tier 1 currently does not provide rebates to qualifying Market 
Makers across all Select Symbols.\14\
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    \14\ In particular, Market Makers that qualify for Market Maker 
Plus Tier 1 in SPY, QQQ or IWM currently do not receive any rebates, 
so it would not be feasible to apply the proposed reduction of $0.08 
to those symbols at the Tier 1 level.
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    As discussed above, the Exchange has observed that in extremely 
volatile months, Market Makers are less likely to meet the stringent 
Market Maker Plus tier qualifications for that month because they are 
unable to hit the tiers as easily. For example, the Exchange observed a 
decrease in Market Maker Plus program participation concurrent with 
increased volatility in August 2019. In particular, in July 2019, 
around 41% of the total number of ISE Market Makers had qualified for 
Market Maker Plus Tier 2 in any Select Symbol. In August 2019, the 
Exchange saw this percentage drop to less than 30%. Had the proposed 
changes been in place for August 2019, around 47% of all ISE Market 
Makers would have qualified for Tier 2 using the 6-month look-back 
period. Given the foregoing, the Exchange seeks to avoid penalizing 
Market Makers that have historically been strong participants in the 
Exchange's Market Maker Plus program by easing the burden on these 
Market Makers to maintain their Market Maker Plus qualification.
    The Exchange believes that the proposed ``lookback'' period of at 
least four out of the previous six months is an appropriate measure of 
strong past performance in the Market Maker Plus program as it requires 
Market Makers to meet the stringent requirements of Market Maker Plus 
Tier 2 or higher for a significant period of time in order to receive 
the reduced rebates.\15\ Furthermore, the Market Maker would also need 
to meet the rigorous Tier 2 qualifications each month going forward to 
maintain the four month cushion in order to glean the proposed rebate 
benefits. The Exchange also believes the proposed reduction of the 
applicable Tier 2 rebate by $0.08 per contract \16\ is set at an 
appropriate level that is lower than any Market Maker Plus tiered 
rebate that a Market Maker would normally receive while still providing 
enough of a cushion that avoids penalizing historically strong Market 
Maker Plus program participants.
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    \15\ See supra note 10.
    \16\ Thus, with the proposed changes, the reduced rebate would 
be $0.10 per contract for the regular maker rebate (i.e., the $0.18 
per contract regular Tier 2 maker rebate reduced by $0.08 per 
contract), and $0.07 per contract for the linked maker rebate (i.e., 
the $0.15 per contract linked Tier 2 maker rebate reduced by $0.08 
per contract).
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    Accordingly, the Exchange believes that its proposal is reasonable 
and equitable because the modified criteria will continue to require 
Market Makers to quote significantly at the NBBO, thereby continuing to 
contribute to market quality in a meaningful way. In fact, with the 
proposed changes, the Exchange will fortify participation in the Market 
Maker Plus program by helping ensure that historically strong program 
participants continue to participate and qualify as Market Maker Plus, 
which will further improve market quality.
    The Exchange believes that the proposed changes to the 
qualifications to Market Maker Plus are not unfairly discriminatory as 
all Market Makers will be subject to the same qualification criteria 
for Market Maker Plus. The Exchange also continues to believe that it 
is not unfairly discriminatory to offer rebates under this program to 
only Market Makers. Market Makers, and in particular, those Market 
Makers that participate in the Market Maker Plus Program and achieve 
Market Maker Plus status, add value through continuous quoting and are 
subject to additional requirements and obligations (such as quoting 
obligations) that other market participants are not. Finally, the 
Exchange believes that the proposed changes will continue to encourage 
Market Makers to post tight markets in Select Symbols, thereby 
increasing liquidity and attracting additional order flow to the 
Exchange, which benefits all market participants in the quality of 
order interaction.

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.
Intra-Market Competition
    The proposed amendments to the Exchange's Market Maker Plus program 
described above do not impose an undue burden on intra-market 
competition. While the proposal would apply directly to those Market 
Makers that achieve the Market Maker Plus Tier 2 standards described 
above, the Exchange believes that the proposed changes will fortify and 
encourage participation in the Market Maker Plus program, ultimately to 
the benefit of all market participants. As discussed

[[Page 57911]]

above, the Exchange believes that the proposed changes will continue to 
encourage all Market Makers to improve market quality by providing 
significant quoting at the NBBO in Select Symbols, which in turn 
improves trading conditions for all market participants through 
narrower bid-ask spreads and increased depth of liquidity available at 
the inside market, thereby attracting additional order flow to the 
Exchange. For these reasons, the Exchange does not believe that its 
proposal will place any category of Exchange market participant at a 
competitive disadvantage.
Inter-Market Competition
    The proposed changes are designed to ensure that the goals of the 
Exchange's Market Maker Plus program are furthered by fortifying 
participation in the program and to avoid penalizing Market Makers that 
have historically made quality markets in Select Symbols for a 
significant amount of time. The Exchange operates in a highly 
competitive market in which market participants can readily favor 
competing venues if they deem fee levels at a particular venue to be 
excessive, or rebate opportunities available at other venues to be more 
favorable. In such an environment, the Exchange must continually adjust 
its fees and rebates to remain competitive. Because competitors are 
free to modify their own fees in response, and because market 
participants may readily adjust their order routing practices, the 
Exchange believes that the degree to which fee changes in this market 
may impose any burden on competition is extremely limited. Moreover, as 
noted above, price competition between exchanges is fierce, with 
liquidity and market share moving freely between exchanges in reaction 
to fee and rebate changes. In sum, if the changes proposed herein are 
unattractive to market participants, it is likely that the Exchange 
will lose market share as a result. Accordingly, the Exchange does not 
believe that the proposed changes will impair the ability of members or 
competing order execution venues to maintain their competitive standing 
in the financial markets.

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) of the Act \17\ and paragraph (f)(2) of Rule 19b-4 
thereunder.\18\ 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 
necessary or appropriate in the public interest, for the protection of 
investors, or 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).
    \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-2019-26 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-2019-26. 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-2019-26 and should be submitted on 
or before November 19, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-23547 Filed 10-28-19; 8:45 am]
 BILLING CODE 8011-01-P