[Federal Register Volume 85, Number 105 (Monday, June 1, 2020)]
[Notices]
[Pages 33231-33234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11646]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88939; File No. SR-ISE-2020-20]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Exchange's Pricing Schedule at Options 7

May 26, 2020.
    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 May 11, 2020, 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 the Exchange's Pricing Schedule at 
Options 7, as described further below.
    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 Exchange proposes to amend its Pricing Schedule at Options 7 
to: (i) Adjust the Market Maker Plus regular maker rebate for SPY, QQQ, 
and IWM, and (ii) modify its QCC and Solicitation Rebate program. The 
Exchange has designated the proposed pricing changes to be operative on 
May 1, 2020. Each change is described below.
    ISE initially filed the proposed rule change on April 30, 2020 (SR-
ISE-2020-19). On May 11, 2020, ISE withdrew that filing and submitted 
this this filing.
Market Maker Plus
    The Exchange currently operates a Market Maker Plus program for 
regular orders in Select \3\ and Non-Select Symbols,\4\ which provides 
tiered incentives to Market Makers \5\ based on the percentage of time 
spent quoting at the national best bid or offer (``NBBO'').\6\ Market 
Makers that qualify for this program will not pay the maker fee of 
$0.11 per contract (in Select Symbols) or $0.70 (in Non-Select 
Symbols), and will instead receive incentives based on the applicable 
Market Maker Plus Tier for which they qualify. 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.\7\ 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. If a 
Market Maker would qualify for a different Market Maker Plus tier in 
each of the two successive periods described above, then the lower of 
the two Market Maker Plus tier fees or rebates would apply to all 
contracts.\8\ 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 
incentive.\9\ These general qualification requirements will remain 
unchanged with the modifications to the applicable Market Maker Plus 
incentives described herein.
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    \3\ ``Select Symbols'' are options overlying all symbols listed 
on the Exchange that are in the Penny Pilot Program.
    \4\ ``Non-Select Symbols'' are options overlying all symbols 
except Select Symbols.
    \5\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See Options 1, 
Section 1(a)(21).
    \6\ See Options 7, Section 3, note 5.
    \7\ 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.
    \8\ 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 is 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.
    \9\ 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 incentive in a given month 
where the Market Maker does not qualify for any Market Maker Plus 
tiers. For Select Symbols, this rebate is the applicable Tier 2 
rebate reduced by $0.08 per contract. For Non-Select Symbols, this 
fee is the Tier 2 fee increased by $0.08 per contract.
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    For SPY, QQQ, and IWM, the Exchange currently provides the below 
maker rebates based on the applicable Market Maker Plus tier for which 
the Market Maker qualifies.

                            SPY, QQQ, and IWM
------------------------------------------------------------------------
    Market maker plus tier (specified      Regular maker   Linked maker
               percentage)                    rebate          rebate
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Tier 1..................................         ($0.00)             N/A
(70% to less than 80%)..................
Tier 2 (80% to less than 85%)...........         ($0.18)         ($0.15)

[[Page 33232]]

 
Tier 3 (85% to less than 90%)...........         ($0.22)         ($0.19)
Tier 4 (90% or greater).................         ($0.26)         ($0.23)
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    The Exchange now proposes to replace Market Maker Plus Tier 1 with 
new Tier 1a and Tier 1b. As proposed, the Market Maker Plus Tier 
qualification requirements and associated incentive will be as follows: 
(1) 50% to less than 65% to qualify for the $0.00 per contract Tier 1a 
regular maker rebate (i.e., free executions instead of paying the $0.11 
per contract maker fee), and (2) 65% to less than 80% to qualify for 
the $0.05 per contract Tier 1b regular maker rebate. Current Market 
Maker Plus Tiers 2-4 as set forth above and the associated maker 
rebates will remain unchanged under this proposal. In addition, the 
Exchange will not offer any linked maker rebates for proposed Tiers 1a 
and 1b.
    The proposed changes are intended to fortify Market Maker 
participation in the Exchange's Market Maker Plus program for SPY, QQQ, 
and IWM. By lowering the percentage of time required to be spent 
quoting at the NBBO that is necessary to qualify for the $0.00 and 
$0.05 per contract regular maker rebates in Tier 1a and Tier 1b, 
respectively, the Exchange seeks to make it easier for Market Makers to 
qualify as Market Maker Plus in SPY, QQQ, and IWM, and to better enable 
existing Market Maker Plus participants to maintain their 
qualifications as such. By fortifying participation in this program, 
the Exchange believes that the proposed changes will continue to 
encourage Market Makers to post quality markets in SPY, QQQ, and IWM, 
thereby improving trading conditions for all market participants 
through narrower bid-ask spreads and increased depth of liquidity 
available at the inside market.
QCC and Solicitation Rebate
    Currently, Members using the Qualified Contingent Cross (``QCC'') 
\10\ and/or other solicited crossing orders, including solicited orders 
executed in the Solicitation,\11\ Facilitation \12\ or Price 
Improvement Mechanisms (``PIM''),\13\ receive rebates for each 
originating contract side in all symbols traded on the Exchange.\14\ 
Once a Member reaches a certain volume threshold in QCC orders and/or 
other solicited crossing orders during a month, the Exchange provides 
rebates to that Member for all of its QCC and solicited crossing order 
traded contracts for that month. The applicable rebates are applied on 
QCC and solicited crossing order traded contracts once the volume 
threshold is met. Members receive the rebate for all QCC and/or other 
solicited crossing orders except for QCC and solicited orders between 
two Priority Customers,\15\ which do not receive any rebate.
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    \10\ A QCC Order is comprised of an originating order to buy or 
sell at least 1000 contracts that is identified as being part of a 
qualified contingent trade, as that term is defined in Supplementary 
Material .01 to Options 3, Section 7, coupled with a contra-side 
order or orders totaling an equal number of contracts. See Options 
3, Section 7(j).
    \11\ The Solicited Order Mechanism is a process by which an 
Electronic Access Member (``EAM'') can attempt to execute orders of 
500 or more contracts it represents as agent against contra orders 
that it solicited. Each order entered into the Solicited Order 
Mechanism shall be designated as all-or-none. See Options 3, Section 
11(d).
    \12\ The Facilitation Mechanism is a process by which an EAM can 
execute a transaction wherein the EAM seeks to facilitate a block-
size order it represents as agent, and/or a transaction wherein the 
EAM solicited interest to execute against a block-size order it 
represents as agent. See Options 3, Section 11(b).
    \13\ The PIM is a process by which an EAM can provide price 
improvement opportunities for a transaction wherein the EAM seeks to 
facilitate an order it represents as agent, and/or a transaction 
wherein the EAM solicited interest to execute against an order it 
represents as agent. See Options 3, Section 13.
    \14\ See Options 7, Section 6.A.
    \15\ A ``Priority Customer'' is a person or entity that is not a 
broker/dealer in securities, and does not place more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s), as defined in Options 1, Section 
1(a)(37).
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    At this time, the Exchange proposes to no longer provide the QCC 
and Solicitation Rebate to solicited orders executed in PIM. The 
Exchange has observed that few members have received this rebate, with 
little associated volume.\16\ To effect this change, the Exchange 
proposes to remove the reference to PIM in Section 6.A. In addition, 
the Exchange proposes to add a new defined term ``Solicited Orders,'' 
which will encompass QCC orders and/or other solicited orders executed 
in the Solicitation and Facilitation Mechanisms, and use this defined 
term throughout Section 6.A to make clear what types of solicited 
crossing orders will qualify the Member for the QCC and Solicitation 
Rebate. The volume thresholds and applicable rebates will remain 
unchanged under this proposal.
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    \16\ For example, of the contract sides that qualified for the 
QCC and Solicitation Rebate in March 2020, less than 1% of that 
volume represented solicited PIM orders.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\17\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\18\ 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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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange's proposed changes to its Pricing Schedule are 
reasonable in several respects. As a threshold matter, the Exchange is 
subject to significant competitive forces in the market for options 
securities 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' . . . .'' \19\
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    \19\ NetCoalition v. SEC, 615 F.3d 525, 539 (DC 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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    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities

[[Page 33233]]

markets. In Regulation NMS, while adopting a series of steps to improve 
the current market model, the Commission highlighted the importance of 
market forces in determining prices and SRO revenues and, also, 
recognized that current regulation of the market system ``has been 
remarkably successful in promoting market competition in its broader 
forms that are most important to investors and listed companies.'' \20\
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    \20\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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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 security 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. As such, 
the proposal represents a reasonable attempt by the Exchange to 
increase its liquidity and market share relative to its competitors.
Market Maker Plus
    The Exchange believes that the proposed changes to its Market Maker 
Plus program for SPY, QQQ, and IWM are reasonable and equitable for 
several reasons. As noted above, the Exchange's proposal is intended to 
fortify participation in this program and improve market quality on 
ISE. The Exchange's proposal to lower the required percentage of time 
spent at the NBBO to qualify for Market Maker Plus Tiers 1a and 1b will 
improve the overall incentive to Market Makers to participate in this 
program by making it easier for Market Makers to qualify for Market 
Maker Plus in SPY, QQQ, and IWM. By broadening the Market Maker Plus in 
this manner, the Exchange will encourage new participants in the 
program and help ensure that existing Market Maker Plus participants 
continue to qualify as such.
    The Exchange will apply the proposed changes to SPY, QQQ, and IWM 
as they are three of the most actively traded symbols on ISE, and the 
Exchange therefore believes that incentivizing liquidity in these three 
names will have a significant and beneficial impact on market quality 
on the Exchange. Further, the Exchange believes that the proposed Tier 
1a and Tier 1b qualifications for SPY, QQQ, and IWM will continue to 
require Market Makers to quote at the NBBO for a significant percentage 
of time in order to glean the benefits of the associated 
incentives.\21\ For the foregoing reasons, the Exchange believes that 
its proposal will further encourage Market Makers to maintain tight 
markets in SPY, QQQ, and IWM, thereby increasing liquidity and 
attracting additional order flow to the Exchange, which will benefit 
all market participants in the quality of order interaction.
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    \21\ As proposed, a Market Maker would need to be on the NBBO 
50% to less than 65% of the time to qualify for the Tier 1a rebate 
of $0.00, and 65% to less than 80% of the time for the Tier 1b 
rebate of $0.05.
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    The Exchange also believes that the proposed changes to the Market 
Maker Plus program for SPY, QQQ, and IWM are not unfairly 
discriminatory as all Market Makers can qualify for this program by 
meeting the requirements that are designed to incentivize Market Makers 
to maintain quality markets. In addition, the Exchange 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.
QCC and Solicitation Rebate
    The Exchange believes that it is reasonable to no longer provide 
the QCC and Solicitation Rebate to solicited orders executed in PIM. As 
noted above, few Members have received this rebate for solicited PIM 
orders, and related volume is low.\22\ As such, the Exchange believes 
that the proposed elimination will have minimal impact on Members. 
Furthermore, the Exchange notes that it already offers competitive 
pricing for PIM orders. For instance, the Exchange currently assesses a 
fee of $0.10 per contract for regular and complex PIM orders to all 
market participants (other than Priority Customers for which the 
Exchange currently charges no fee), which is significantly lower than 
the Exchange's other transaction fees, including the fees assessed to 
other Crossing Orders.\23\ Furthermore, this $0.10 per contract fee may 
be further reduced if the non-Priority Customer executes a certain ADV 
threshold in PIM in a given month.\24\ Accordingly, the Exchange 
believes that its pricing structure for PIM, with the proposed changes, 
will continue to encourage market participant PIM activity, including 
solicited PIM activity, and will streamline its PIM incentive 
structure.
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    \22\ See supra note 16.
    \23\ A ``Crossing Order'' is an order executed in the Exchange's 
Facilitation Mechanism, Solicited Order Mechanism, PIM or submitted 
as a QCC order. For purposes of this Pricing Schedule, orders 
executed in the Block Order Mechanism are also considered Crossing 
Orders. Today, the Exchange charges all non-Priority Customers a 
$0.20 per contract fee for regular and complex Crossing Orders 
except PIM orders. Priority Customers are not charged Crossing Order 
fees. See Options 7, Section 3 and Section 4.
    \24\ See Options 7, Section 3, note 13 (setting forth discounted 
PIM fees for regular orders) and Section 4, note 9 (setting forth 
discounted PIM fees for complex orders).
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    The Exchange also believes that its proposal is equitable and not 
unfairly discriminatory because with the proposed changes, no market 
participant will receive the rebate for solicited PIM orders. 
Accordingly, the Exchange's proposal will apply uniformly to all market 
participants.

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.
    In terms of intra-market competition, the Exchange does not believe 
that its proposal will place any category of Exchange market 
participant at a competitive disadvantage. The proposed changes to the 
Market Maker Plus program for SPY, QQQ, and IWM are intended to improve 
market quality by fortifying and encouraging participation in this 
program. As discussed above, the Exchange believes that its proposal 
will encourage all Market Makers to improve market quality by providing 
significant quoting at the NBBO in SPY, QQQ, and IWM, 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. As it relates to the proposed elimination of the rebate for 
solicited PIM orders, the Exchange believes that its proposal will 
continue to encourage market participant activity in PIM given the 
Exchange's competitive PIM pricing structure, as discussed above. 
Accordingly, the Exchange believes that the proposed changes will 
continue to attract order flow to the Exchange, thereby encouraging 
additional volume and liquidity to the benefit of all market 
participants.
    In terms of inter-market competition, the Exchange notes that it 
operates in a highly competitive market in which market participants 
can readily favor competing venues if they deem fee

[[Page 33234]]

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 to remain competitive 
with other options exchanges. 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)(ii) of the Act \25\ and Rule 19b-4(f)(2) \26\ thereunder. 
At any time within 60 days of the filing of the proposed rule change, 
the Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is: (i) Necessary or 
appropriate in the public interest; (ii) for the protection of 
investors; or (iii) otherwise in furtherance of the purposes of the 
Act. If the Commission takes such action, the Commission shall 
institute proceedings to determine whether the proposed rule should be 
approved or disapproved.
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    \25\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \26\ 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-2020-20 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-2020-20. 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-2020-20 and should be submitted on 
or before June 22, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11646 Filed 5-29-20; 8:45 am]
 BILLING CODE 8011-01-P