[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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
------------------------------------------------------------------------
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)
------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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)).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\20\ Securities Exchange Act Release No. 51808 (June 9, 2005),
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78s(b)(3)(A)(ii).
\26\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\27\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11646 Filed 5-29-20; 8:45 am]
BILLING CODE 8011-01-P