[Federal Register Volume 89, Number 62 (Friday, March 29, 2024)]
[Notices]
[Pages 22294-22322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-06452]



[[Page 22293]]

Vol. 89

Friday,

No. 62

March 29, 2024

Part III





 Securities and Exchange Commission





-----------------------------------------------------------------------





Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of 
Proposed Rule Change To Adopt Rules To List and Trade FLEX Options; 
Notice

  Federal Register / Vol. 89 , No. 62 / Friday, March 29, 2024 / 
Notices  

[[Page 22294]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99825; File No. SR-ISE-2024-12]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
of Proposed Rule Change To Adopt Rules To List and Trade FLEX Options

March 21, 2024
    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 March 11, 2024, 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, II, and III, below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \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 adopt rules that will govern the listing 
and trading of flexible exchange options (``FLEX Options'').
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/ise/rules, 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 adopt rules in new Options 3A that will 
govern the listing and trading of FLEX Options on the Exchange's 
electronic market.
    The Exchange is proposing this new functionality be implemented in 
connection with a technology migration to enhanced Nasdaq, Inc. 
(``Nasdaq'') functionality that will result in higher performance, 
scalability, and more robust architecture.\3\ The Exchange intends to 
begin implementation of the proposed rule change before December 20, 
2024. The Exchange will issue a public notice to Members to provide 
notification of the FLEX implementation date.
---------------------------------------------------------------------------

    \3\ The Exchange is separately proposing a number of rule 
filings in connection with this technology migration. See, e.g., 
Securities Exchange Act Release No. 97605 (May 26, 2023), 88 FR 
36350 (June 2, 2023) (SR-ISE-2023-10).
---------------------------------------------------------------------------

    As proposed, FLEX Options will be customized options contracts that 
will allow investors to tailor contract terms for exchange-listed 
equity and index options. FLEX Options will be designed to meet the 
needs of investors for greater flexibility in selecting the terms of 
options within the parameters of the Exchange's proposed rules. FLEX 
Options will not be preestablished for trading and will not be listed 
individually for trading on the Exchange. Rather, investors will select 
FLEX Option terms and will be limited by the parameters detailed below 
in their selection of those terms. As a result, FLEX Options would 
allow investors to specify more specific, individualized investment 
objectives than may be available to them in the standardized options 
market.
    Some key features of the new electronic FLEX Options functionality 
are as follows:
     System Availability: The Exchange will not conduct an 
Opening Process pursuant to Options 3, Section 8 in FLEX Options.\4\ 
Orders in FLEX Options may only be submitted through an electronic FLEX 
Auction, a FLEX Price Improvement Auction (``FLEX PIM''), or a FLEX 
Solicited Order Mechanism (``FLEX SOM''), each as discussed in detail 
below.\5\ Accordingly, the Exchange's simple and complex order books 
will not be available for transactions in FLEX Options.\6\
---------------------------------------------------------------------------

    \4\ See proposed Options 3A, Section 8(a). Rather, Members may 
begin submitting orders in FLEX Options into one of the proposed 
auction mechanisms (i.e., electronic FLEX Auction, FLEX Price 
Improvement Mechanism, and FLEX Solicited Order Mechanism) once the 
underlying security is open for trading. See proposed Options 3A, 
Section 8(b).
    \5\ See proposed Options 3A, Section 11(a).
    \6\ See proposed Options 3A, Section 10(a).
---------------------------------------------------------------------------

     Terms: FLEX Options will be a type of put or call, and 
will allow investors the flexibility to choose an exercise style of 
American or European, an expiration date, a settlement type, and an 
exercise price, all within the parameters specified in the proposed 
rules.\7\ As discussed further below, FLEX Options will not be 
permitted with identical terms as an existing non-FLEX Option series 
listed on the Exchange.\8\
---------------------------------------------------------------------------

    \7\ As discussed later in this filing, proposed Options 3A, 
Section 3(c) will govern FLEX Options terms.
    \8\ At least one of the following terms must differ between FLEX 
Options and non-FLEX Options on the same underlying security: 
exercise date, exercise price, or exercise style. See proposed 
Options 3A, Section 3(c).
---------------------------------------------------------------------------

    Because of their composition, the Exchange believes that FLEX 
Options may allow investors to more closely meet their individual 
investment and hedging objectives by customizing options contracts for 
the purpose of satisfying particular investment objectives that could 
not be met by the standardized markets.
Background
    The Commission approved the trading of FLEX Options in 1993.\9\ At 
the time, the Chicago Board Options Exchange, Inc., now Cboe Exchange, 
Inc. (``Cboe'') proposed FLEX options based on the Standard and Poor's 
Corporation 500 and 100 Stock Indexes.\10\ These FLEX Options were 
offered as an alternative to an over-the-counter (``OTC'') market in 
customized equity options.\11\ Several years after the initial 
approval, the Commission approved the trading of additional FLEX 
Options on specified equity securities.\12\ In its order, the 
Commission provided: ``The benefits of the Exchanges' options markets 
include, but are not limited to, a centralized market center, an 
auction market with posted transparent market quotations and 
transaction reporting, parameters and procedures for clearance and 
settlement, and the guarantee of the OCC [Options Clearing Corporation] 
for all contracts traded on the Exchange.'' \13\
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 31920 (February 24, 
1993), 58 FR 12280 (March 3, 1993) (SR-CBOE-92-17) (Order Approving 
and Notice of Filing and Order Granting Accelerated Approval to 
Amendment Nos. 1, 2, 3, and 4 to Proposed Rule Changes by the 
Chicago Board Options Exchange, Inc., Relating to FLEX Options).
    \10\ Id.
    \11\ Id.
    \12\ See Securities Exchange Act Release No. 36841 (February 14, 
1996), 61 FR 6666 (February 21, 1996) (SR-CBOE-95-43) (SR-PSE-95-24) 
(Order Approving Proposed Rule Changes and Notice of Filing and 
Order Granting Accelerated Approval of Amendments by the Chicago 
Board Options Exchange, Inc. and the Pacific Stock Exchange, Inc., 
Relating to the Listing of Flexible Exchange Options on Specified 
Equity Securities).
    \13\ Id. The Exchange notes that the Commission found pursuant 
to Rule 9b-1 under the Act, that FLEX Options, including FLEX Equity 
Options, are standardized options for purposes of the options 
disclosure framework established under Rule 9b-1 of the Act. Id.

---------------------------------------------------------------------------

[[Page 22295]]

    The Exchange notes that FLEX Options are currently traded on Cboe, 
NYSE American LLC (``NYSE American''), NYSE Arca, Inc. (``NYSE Arca''), 
and Nasdaq PHLX LLC (``Phlx'').\14\ The Exchange further notes that 
Cboe offers electronic and open outcry FLEX Options trading while NYSE 
American, NYSE Arca, and Phlx offer only open outcry trading of FLEX 
Options on their respective trading floors. The Exchange now proposes 
to allow for the trading of FLEX Options on its electronic market \15\ 
in a substantially similar manner as Cboe's electronic FLEX Options, 
with certain intended differences primarily to align to current System 
\16\ behavior (and especially current auction behavior) to provide 
increased consistency for Members trading FLEX Options and non-FLEX 
Options on ISE, as discussed in detail below. Further, the Exchange has 
omitted certain Cboe rules from the proposed rules due to differences 
in scope and operation of FLEX trading at Cboe compared to the proposed 
scope and operation of FLEX trading on ISE, each as noted below. For 
example, the Exchange will not include Cboe rule provisions related to 
open outcry trading, Asian- or Cliquet-settled FLEX index options, or 
FLEX index options with an index multiplier of one (``Micro FLEX Index 
Options'') as it does not offer these capabilities today. For the same 
reason, the Exchange will not allow prices in FLEX trading to be 
expressed as percentages under this proposal.
---------------------------------------------------------------------------

    \14\ See Cboe Rules 4.20-4.22 and 5.70-5.75, NYSE American Rules 
900G-910G, NYSE Arca Rules 5.30-O-5.41-O, and Phlx Options 8, 
Section 34. The Exchange also notes that another options exchange, 
BOX Exchange LLC (``BOX''), recently filed a rule change with the 
Commission to allow for the trading of FLEX equity options on the 
BOX trading floor. See Securities Exchange Act Release No. 99192 
(December 15, 2023), 88 FR 88437 (December 21, 2023) (SR-BOX-2023-
20).
    \15\ The Exchange is not proposing to add open outcry FLEX 
Options trading as it does not have a trading floor.
    \16\ The term ``System'' means the electronic system operated by 
the Exchange that receives and disseminates quotes, executes orders 
and reports transactions. See Options 1, Section 1(a)(50).
---------------------------------------------------------------------------

Proposal
    Transactions in FLEX Options traded on the Exchange will generally 
be subject to the same rules that apply to the trading of equity 
options and index options. In order, however, to provide investors with 
the flexibility to designate certain of the terms of the options, and 
to accommodate other special features of FLEX Options and the way in 
which they are traded, the Exchange proposes new rules applicable to 
FLEX Options in new Options 3A, Sections 1-19.
A. General Provisions (Section 1)
    Proposed Section 1(a) will set forth the applicability of Exchange 
Rules, and will provide that Options 3A Rules will apply only to FLEX 
Options and that trading of FLEX Options will be subject to all other 
Rules applicable to the trading of options on the Exchange, unless 
otherwise provided in Options 3A.
    Proposed Section 1(b) will set forth the definitions used 
specifically in Options 3A, namely that the term ``FLEX Option'' means 
a flexible exchange option. A FLEX Option on an equity security may be 
referred to as a ``FLEX Equity Option,'' and a FLEX Option on an index 
may be referred to as a ``FLEX Index Option.'' Further, the term ``FLEX 
Order'' means an order submitted in a FLEX Option pursuant to Options 
3A.
    The Exchange also proposes to add the definition of ``FLEX Order'' 
in Options 3, Section 7 (Order Types) in new paragraph (z). While FLEX 
Orders will also be defined in (and governed by) Options 3A, the 
Exchange believes that it will be useful to market participants to have 
the order types available on ISE centralized within one rule. Lastly, 
the Exchange proposes a non-substantive change to paragraph (y) in 
Options 3, Section 7 to fix a typo.
B. Hours of Business (Section 2)
    Proposed Section 2(a) will provide that the trading hours for FLEX 
Options will be the same as the trading hours for corresponding non-
FLEX Options as set forth in Options 3, Section 1, except the Exchange 
may determine to narrow or otherwise restrict the trading hours for 
FLEX Options.\17\ Therefore, the trading hours for FLEX Options will 
generally be 9:30 a.m. to 4:00 p.m. Eastern time (or 4:15 p.m. Eastern 
time for Fund Shares, as defined in Options 4, Section 3(h), Index-
Linked Securities, as defined in Options 4, Section 3(k)(1), or certain 
broad-based indexes).\18\
---------------------------------------------------------------------------

    \17\ See Cboe Rule 5.1(b)(3)(A) for materially identical 
provisions.
    \18\ See Options 3, Section 1(c)-(e).
---------------------------------------------------------------------------

C. FLEX Option Classes and Permissible Series (Section 3(a) and (b))
    Pursuant to proposed Section 3(a), the Exchange may authorize for 
trading a FLEX Option class on any equity security or index if it may 
authorize for trading a non-FLEX Option class on that equity security 
or index pursuant to Options 4, Section 3 and Options 4A, Section 
3,\19\ respectively, even if the Exchange does not list that non-FLEX 
Option class for trading.\20\
---------------------------------------------------------------------------

    \19\ Options 4, Section 3 provides the criteria for the listing 
of options on several different underlying types of securities, 
including, for example, securities registered with the SEC under 
Regulation NMS of the Act (``NMS stock'') and exchange-traded funds 
(``ETFs''). Options 4A, Section provides the criteria for the 
listing of options on indexes.
    \20\ See Cboe Rule 4.20 for materially identical provisions.
---------------------------------------------------------------------------

    Proposed Section 3(b) will provide that the Exchange may approve a 
FLEX Option series for trading in any FLEX Option class it may 
authorize for trading pursuant to proposed Section 3(a). FLEX Option 
series are not pre-established. A FLEX Option series is eligible for 
trading on the Exchange upon submission to the System of a FLEX Order 
for that series pursuant to proposed Sections 11 through 13,\21\ 
subject to the following stipulations.\22\ First, the Exchange will 
only permit trading in a put or call FLEX Option series that does not 
have the same exercise style, same expiration date, and same exercise 
price as a non-FLEX Option series on the same underlying security or 
index that is already available for trading. This would include 
permitting trading in a FLEX Option series before a series with 
identical terms is listed for trading as a non-FLEX Option series. If 
the Exchange lists for trading a non-FLEX Option series with identical 
terms as a FLEX Option series, the FLEX Option series will become 
fungible with the non-FLEX Option series pursuant to proposed paragraph 
(d) of Section 3. The System would not accept a FLEX Order for a put or 
call FLEX Option series if a non-FLEX Option series on the same 
underlying security or index with the same expiration date, exercise 
price, and exercise style is already listed for trading.\23\ Second, a 
FLEX Order for a FLEX Option series may be submitted on any trading day 
prior to the expiration date.\24\
---------------------------------------------------------------------------

    \21\ Proposed Sections 11 through 13 of Options 3A will govern 
the electronic FLEX Auction, FLEX PIM, and FLEX SOM, respectively. 
As discussed later in this filing, FLEX Orders may only be submitted 
through an electronic FLEX Auction, FLEX PIM, or FLEX SOM.
    \22\ See proposed Options 3A, Section 3(b), which is based on 
Cboe Rule 4.21(a).
    \23\ See proposed Options 3A, Section 3(b)(1), which is based on 
Cboe Rule 4.21(a)(1).
    \24\ See proposed Options 3A, Section 3(b)(2), which is based on 
Cboe Rule 4.21(a)(2).
---------------------------------------------------------------------------

D. FLEX Options Terms (Section 3(c))
    Proposed Section 3(c) will specify the terms that must be included 
in a FLEX Order.\25\ Specifically, when submitting a

[[Page 22296]]

FLEX Order for a FLEX Option series to the System, the submitting 
Member must include one of each of the terms detailed in proposed 
subparagraphs (1)-(6) of Section 3(c) in the FLEX Order (all other 
terms of a FLEX Option series are the same as those that apply to non-
FLEX Options), provided that a FLEX Equity Option overlying an ETF 
(cash- or physically-settled) may not be the same type (put or call) 
and may not have the same exercise style, expiration date, and exercise 
price as a non-FLEX Equity Option overlying the same ETF,\26\ which 
terms constitute the FLEX Option series.
---------------------------------------------------------------------------

    \25\ See Cboe Rule 4.21(b) for similar provisions. The Exchange 
notes that unlike Cboe, it is not proposing FLEX Index Options with 
a multiplier of 1 (i.e., Micro FLEX Index Options) or FLEX Index 
Options that are Asian- or Cliquet-settled as the Exchange does not 
have these capabilities today for index options. For the same 
reason, the Exchange is not proposing to allow exercise prices to be 
expressed as a percentage value. Therefore, the Exchange has not 
incorporated the applicable provisions in this Rule.
    \26\ The Exchange will discuss cash-settled FLEX Equity Options 
overlying an ETF (``cash-settled FLEX ETFs'') later in this filing. 
As discussed below, the Commission previously approved a rule filing 
by NYSE American to permit the listing and trading of this product, 
and Cboe recently filed an immediately effective rule change based 
on NYSE American's filing. See infra notes 186 and 187.
---------------------------------------------------------------------------

    As proposed, the submitting Member must specify the following terms 
in the FLEX Order: (1) underlying equity security or index, as 
applicable (the index multiplier for FLEX Index Options is 100; \27\ 
(2) type of option (i.e., put or call); \28\ (3) exercise style, which 
may be American-style or European-style; \29\ (4) expiration date, 
which may be any business day (specified to the day, month, and year) 
no more than 15 years from the date on which a Member submits a FLEX 
Order to the System; \30\ (5) settlement type for the FLEX Equity 
Option or FLEX Index Option, as applicable; \31\ and (6) exercise 
price, which may be in increments no smaller than $0.01.\32\ Further, 
the Exchange may determine the smallest increment for exercise prices 
of FLEX Options on a class-by-class basis.\33\
---------------------------------------------------------------------------

    \27\ See proposed Options 3A, Section 3(c)(1), which is based on 
Cboe Rule 4.21(b)(1) except for the provisions relating to Micro 
FLEX Index Options.
    \28\ See proposed Options 3A, Section 3(c)(2), which is based on 
Cboe Rule 4.21(b)(2) except the provisions related to Asian-settled 
or Cliquet-settled FLEX Index Options.
    \29\ See proposed Options 3A, Section 3(c)(3), which is based on 
Cboe Rule 4.21(b)(3) except with respect to Asian-settled or 
Cliquet-settled FLEX Index Options.
    \30\ See proposed Options 3A, Section 3(c)(4), which is based on 
Cboe Rule 4.21(b)(4) except with respect to Asian-settled or 
Cliquet-settled FLEX Index Options.
    \31\ See proposed Options 3A, Section 3(c)(5), which is based on 
Cboe Rule 4.21(b)(5) except with respect to Asian-settled or 
Cliquet-settled FLEX Index Options.
    \32\ See proposed Options 3A, Section 3(c)(6), which is based on 
Cboe Rule 4.21(b)(6) except the Exchange is not proposing Cliquet-
settled Index Options or to allow exercise prices to be expressed as 
a percentage value.
    \33\ See proposed Options 3A, Section 3(c), which is based on 
Cboe Rule 4.21(b) except for the provisions allowing the exercise 
price to be expressed as a percentage amount and with respect to 
Micro FLEX Index Options. As noted above, the Exchange does not 
offer these capabilities today for non-FLEX index options.
---------------------------------------------------------------------------

    As it relates to the settlement type for FLEX Equity Options, the 
Exchange proposes in subparagraph (c)(5)(A)(i) of Options 3A, Section 3 
that FLEX Equity Options, other than as permitted in proposed 
subparagraphs (c)(5)(A)(ii) and (iii), are settled with physical 
delivery of the underlying security. Proposed subparagraph 
(c)(5)(A)(ii) will allow for the cash-settlement of certain qualifying 
FLEX Equity Options with an underlying security that is an ETF.\34\ 
Proposed subparagraph (c)(5)(A)(iii) will provide that FLEX Equity 
Options are subject to the exercise by exception provisions of OCC Rule 
805.
---------------------------------------------------------------------------

    \34\ As discussed later in this filing, the Exchange is 
proposing to list and trade cash-settled FLEX ETFs in the same 
manner as NYSE American and Cboe.
---------------------------------------------------------------------------

    As it relates to the settlement type for FLEX Index Options, the 
Exchange proposes in subparagraphs (c)(5)(B)(i) and (ii) of Options 3A, 
Section 3 that FLEX Index Options are settled in U.S. dollars, and may 
be either a.m.-settled (with exercise settlement value determined by 
reference to the reported level of the index derived from the reported 
opening prices of the component securities) or p.m.-settled (with 
exercise settlement value determined by reference to the reported level 
of the index derived from the reported closing prices of the component 
securities). The Exchange notes that Cboe recently received approval of 
its pilot program that permitted it to list p.m.-settled FLEX Index 
Options whose exercise settlement value is derived from closing prices 
on the last trading day prior to expiration that expire on or within 
two business days of a third Friday-of-the-month expiration day for a 
non-FLEX Option (``FLEX PM Third Friday Options'').\35\ Consistent with 
the Commission's approval of Cboe's proposal, the Exchange is proposing 
to allow the listing of FLEX PM Third Friday Options on ISE as well, 
and will align proposed Section 3(c)(5)(B)(ii) with Cboe Rule 
4.21(b)(5)(B)(ii).
---------------------------------------------------------------------------

    \35\ See Securities Exchange Act Release No. 99222 (December 21, 
2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX 
Settlement Pilot Approval''). In support of making the pilot a 
permanent program, Cboe cited to its own review of pilot data during 
the course of the pilot program and a study by the Commission's 
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX 
Settlement Pilot Approval, notes 18 and 35.
---------------------------------------------------------------------------

E. FLEX Fungibility (Section 3(d))
    Proposed Section 3(d)(1)(A) will provide that if the Exchange lists 
for trading a non-FLEX Option series with identical terms as a FLEX 
Option series, all existing open positions established under the FLEX 
trading procedures will become fully fungible with transactions in the 
identical non-FLEX Option series.\36\ In addition, proposed Section 
3(d)(1)(B) will provide that any further trading in the series would be 
as non-FLEX Options subject to non-FLEX trading procedures and 
Rules.\37\ The foregoing provisions are materially identical to Cboe 
Rule 4.22(a)(1) and (2).
---------------------------------------------------------------------------

    \36\ An open position resulting from a transaction on the 
Exchange becomes fungible post-trade and is separate from the 
execution occurring on the Exchange. For example, assume a Member 
buys one (1) American style AAPL call option expiring on October 9, 
2024, with a strike price of 150, which is a FLEX series because 
there is no standard option listed with those same terms. Now 
assume, while holding this position, a standard option with the same 
terms is listed (American style AAPL call option expiring on October 
9, 2024, with a strike price of 150). After this standard option is 
listed, the Member purchases one (1) contract in this non-FLEX 
option series. After this second transaction, the Participant will 
have an open position of two (2) contracts in the standard AAPL call 
expiring on October 9, 2024, with a 150 strike price.
    \37\ This includes all priority and trade-through provisions on 
the Exchange. See, e.g., Options 3, Section 10 and Options 5, 
Section 2.
---------------------------------------------------------------------------

    Unlike Cboe, however, the Exchange will not permit intraday 
additions of a non-FLEX Option series with identical terms as an 
already-listed FLEX Option series for the remainder of the trading 
day.\38\ As a result, the Exchange will not incorporate the provisions 
in Cboe Rule 4.22(b) that relate to allowing closing-only transactions 
for FLEX Option series that become fungible with identical non-FLEX 
Option series.
---------------------------------------------------------------------------

    \38\ See proposed Options 3A, Section 3(d)(2). In such 
instances, the non-FLEX Option series could be added overnight to 
begin trading the next trading day (upon which all existing open 
positions in the FLEX Option would become fully fungible with 
transactions in the identical non-FLEX Option series, and any 
further trading in the series would be as non-FLEX Options subject 
to non-FLEX trading procedures and Rules).
---------------------------------------------------------------------------

    Lastly, in the event the relevant expiration is a holiday pursuant 
to General 3, Rule 1030,\39\ proposed Section 3(d) will apply to 
options with an expiration date that is the business day immediately 
preceding the holiday, except for Monday-expiring Weekly Expirations 
(as defined in Options 4A, Section 3), in which case proposed Section 
3(d) will apply to options with

[[Page 22297]]

an expiration date that is a business day immediately following the 
holiday.\40\
---------------------------------------------------------------------------

    \39\ ISE General 3 (including Rule 1030) incorporates by 
reference Series 1000 of the Rules of The Nasdaq Stock Market, LLC 
(``Nasdaq'').
    \40\ See proposed Options 3A, Section 3(d)(3), which is based on 
Cboe Rule 4.22(c).
---------------------------------------------------------------------------

F. Units of Trading; Minimum Trading Increments (Sections 4 and 5)
    Proposed Section 4(a) of Options 3A will provide that bids and 
offers for FLEX Options must be expressed in U.S. dollars and decimals 
in the minimum increments as set forth in proposed Section 5.\41\ 
Proposed Section 5(a) will provide that the Exchange would determine 
the minimum increment for bids and offers on FLEX Options on a class-
by-class basis, which may not be smaller than $0.01.\42\
---------------------------------------------------------------------------

    \41\ See Cboe Rule 5.3(e)(3) for similar provisions, except the 
Exchange is not proposing to allow prices to be expressed as a 
percentage value, or to provide for Micro FLEX Index Options.
    \42\ See Cboe Rule 5.4(c)(4) for similar provisions, except the 
Exchange is not proposing to allow prices to be expressed as a 
percentage value.
---------------------------------------------------------------------------

G. Types of Orders; Order and Quote Protocols (Section 6)
    Pursuant to proposed Section 6(a), the Exchange may determine to 
make the order types and times-in-force, respectively, in Options 3, 
Section 7 available on a class or System basis for FLEX Orders.\43\ The 
Exchange notes that it currently has the authority to make certain 
order types and times-in-force available on a class or System basis for 
non-FLEX Options pursuant to Options 3, Section 7, and therefore 
proposes to have similar authority with respect to FLEX Options.
---------------------------------------------------------------------------

    \43\ See Options 3, Section 7 for descriptions of these order 
types and times-in-force.
---------------------------------------------------------------------------

    Proposed Section 6(b) will provide that the following order and 
quote protocols in Supplementary Material .03 to Options 3, Section 7 
will be available for FLEX Orders, FLEX auction notifications, and FLEX 
auction responses:
     FIX: \44\ FLEX Orders and FLEX auction responses
---------------------------------------------------------------------------

    \44\ ``Financial Information eXchange'' or ``FIX'' is an 
interface that allows Members and their Sponsored Customers to 
connect, send, and receive messages related to orders and auction 
orders to the Exchange. Features include the following: (1) 
execution messages; (2) order messages; (3) risk protection triggers 
and cancel notifications; and (4) post trade allocation messages.
---------------------------------------------------------------------------

     OTTO: \45\ FLEX Orders, FLEX auction notifications, and 
FLEX auction responses
---------------------------------------------------------------------------

    \45\ ``Ouch to Trade Options'' or ``OTTO'' is an interface that 
allows Members and their Sponsored Customers to connect, send, and 
receive messages related to orders, auction orders, and auction 
responses to the Exchange. Features include the following: (1) 
options symbol directory messages (e.g., underlying and complex 
instruments); (2) System event messages (e.g., start of trading 
hours messages and start of opening); (3) trading action messages 
(e.g., halts and resumes); (4) execution messages; (5) order 
messages; (6) risk protection triggers and cancel notifications; (7) 
auction notifications; (8) auction responses; and (9) post trade 
allocation messages.
---------------------------------------------------------------------------

     SQF: \46\ FLEX auction notifications and FLEX auction 
responses
---------------------------------------------------------------------------

    \46\ ``Specialized Quote Feed'' or ``SQF'' is an interface that 
allows Market Makers to connect, send, and receive messages related 
to quotes, Immediate-or-Cancel Orders, and auction responses to the 
Exchange. Features include the following: (1) options symbol 
directory messages (e.g., underlying and complex instruments); (2) 
System event messages (e.g., start of trading hours messages and 
start of opening); (3) trading action messages (e.g., halts and 
resumes); (4) execution messages; (5) quote messages; (6) Immediate-
or-Cancel Order messages; (7) risk protection triggers and purge 
notifications; (8) opening imbalance messages; (9) auction 
notifications; and (10) auction responses. The SQF Purge Interface 
only receives and notifies of purge requests from the Market Maker. 
Market Makers may only enter interest into SQF in their assigned 
options series.
---------------------------------------------------------------------------

H. Complex Orders (Section 7)
    Pursuant to proposed Section 7(a), the Exchange may make complex 
orders, including a Complex Options Order,\47\ Stock-Options Order,\48\ 
and Stock-Complex Order \49\ available for FLEX trading. Complex FLEX 
Orders may have up to the maximum number of legs determined by the 
Exchange.\50\ Each leg of a complex FLEX Order: (1) must be for a FLEX 
Option series authorized for FLEX trading with the same underlying 
equity security or index; (2) must have the same exercise style 
(American or European); and (3) for a FLEX Index Option, may have a 
different settlement type (a.m.-settled or p.m.-settled).\51\
---------------------------------------------------------------------------

    \47\ A Complex Options Order is an order for a Complex Options 
Strategy, which is the simultaneous purchase and/or sale of two or 
more different options series in the same underlying security, for 
the same account, in a ratio that is equal to or greater than one-
to-three (.333) and less than or equal to three-to-one (3.00) and 
for the purpose of executing a particular investment strategy. See 
Options 3, Section 14(a)(1).
    \48\ A Stock-Option Order is an order for a Stock-Option 
Strategy, which is the purchase or sale of a stated number of units 
of an underlying stock or a security convertible into the underlying 
stock (``convertible security'') coupled with the purchase or sale 
of options contract(s) on the opposite side of the market 
representing either (A) the same number of units of the underlying 
stock or convertible security, or (B) the number of units of the 
underlying stock necessary to create a delta neutral position, but 
in no case in a ratio greater than eight-to-one (8.00), where the 
ratio represents the total number of units of the underlying stock 
or convertible security in the option leg to the total number of 
units of the underlying stock or convertible security in the stock 
leg. See Options 3, Section 14(a)(2).
    \49\ A Stock-Complex Order is an order for a Stock-Complex 
Strategy, which is the purchase or sale of a stated number of units 
of an underlying stock or a security convertible into the underlying 
stock (``convertible security'') coupled with the purchase or sale 
of a Complex Options Strategy on the opposite side of the market 
representing either (A) the same number of units of the underlying 
stock or convertible security, or (B) the number of units of the 
underlying stock necessary to create a delta neutral position, but 
in no case in a ratio greater than eight-to-one (8.00), where the 
ratio represents the total number of units of the underlying stock 
or convertible security in the option legs to the total number of 
units of the underlying stock or convertible security in the stock 
leg. See Options 3, Section 14(a)(3).
    \50\ The Exchange will initially permit a maximum of 10 legs.
    \51\ See Cboe Rule 5.70(b) for similar provisions except the 
Exchange is not proposing Asian-settled or Cliquet-settled FLEX 
Index Options, as currently specified in Cboe Rule 5.70(b)(3).
---------------------------------------------------------------------------

    Pursuant to proposed Section 7(b), complex FLEX Orders may not have 
to adhere to the ratio requirements in Options 3, Sections 14(a)(1)-
(3), as determined by the Exchange on a class-by-class basis. Options 
3, Sections 14(a)(1)-(3) currently includes the complex ratio 
requirements for Complex Options Strategies, Stock-Options Strategies, 
and Stock-Complex Strategies.\52\ The Exchange is not changing the 
complex ratio requirements for non-FLEX complex orders under this 
proposal. Instead, it is proposing to offer this feature only for 
complex FLEX Orders so that Members may submit complex FLEX Orders with 
any ratio.\53\ The Exchange notes that Cboe currently permits complex 
FLEX Orders to be submitted with any ratio.\54\
---------------------------------------------------------------------------

    \52\ See supra notes 47-49.
    \53\ For instance, the Exchange may permit Complex Options 
Strategies with a ratio on the options legs less than one-to-three 
(.333) or greater than three-to-one (3.00), and Stock-Option 
Strategies with a ratio greater than eight-to-one (8.00), where the 
ratio represents the total number of units of the underlying stock 
or convertible security in the option leg(s) to the total number of 
units of the underlying stock or convertible security in the stock 
leg.
    \54\ See Cboe US Options Complex Book Process, Section 2.1 
(Ratios) and Section 3 (Complex FLEX Order Functionality), available 
at https://cdn.cboe.com/resources/membership/US-Options-Complex-Book-Process.pdf. Unlike Cboe, the Exchange will continue to require 
non-FLEX complex orders to adhere to the complex ratios in Options 
3, Sections 14(a)(1)-(3), and therefore will not permit non-FLEX 
complex orders to be submitted in any ratio outside of those 
stipulated in Section 14.
---------------------------------------------------------------------------

I. Opening of FLEX Trading (Section 8)
    Proposed Section 8 will specify that there will be no Opening 
Process pursuant to Options 3, Section 8 in FLEX Options. Instead, 
Members may begin submitting FLEX Orders into an electronic FLEX 
Auction pursuant to proposed Section 11(b), a FLEX PIM pursuant to 
proposed Section 12, or a FLEX SOM pursuant to proposed Section 13 when 
the underlying security is open for trading.\55\ Because market 
participants incorporate transaction prices of underlying securities or 
the values of underlying indexes when pricing options (including FLEX

[[Page 22298]]

Options), the Exchange believes that it will benefit investors for FLEX 
Options trading to not be available until that information has begun to 
be disseminated in the market (i.e., when the security opens for 
trading).
---------------------------------------------------------------------------

    \55\ See proposed Options 3A, Section 8(a) and (b), which is 
based on Cboe Rule 5.71 except with respect to open outcry trading 
and trading sessions outside of regular trading hours.
---------------------------------------------------------------------------

    Additionally, the Exchange's Opening Process is used to open or 
reopen a series of options on ISE at a single opening price.\56\ There 
is a period of time before an options series opens during which orders 
placed on the Exchange's order book do not generate trade executions 
but may participate in the Opening Process.\57\ As noted above, FLEX 
Options will not be placed on the Exchange's simple and complex order 
books and therefore will not have an Opening Process.\58\ FLEX Options 
are created with terms unique to individual investment objectives. As 
such, each investor may require FLEX Options with slightly different 
terms than those already created. These individually defined FLEX 
Options are customized for each investor, so the Opening Process may 
not be useful for investors who may create their own FLEX Options 
because the Opening Process is designed, in part, to determine a single 
opening, or reopening, price based on orders and quotes from multiple 
Members. With the bespoke nature of FLEX Options, there is not the 
opportunity, nor the need, to bring together multiple orders and quotes 
as part of an Opening Process.
---------------------------------------------------------------------------

    \56\ See Options 3, Section 8(h) and (j).
    \57\ See Options 3, Section 8(c).
    \58\ See proposed Options 3A, Section 10(a). Instead, Members 
will be required to submit FLEX Orders into an electronic FLEX 
Auction, FLEX PIM, or FLEX SOM. See proposed Options 3A, Section 
11(a).
---------------------------------------------------------------------------

J. Trading Halts (Section 9)
    Proposed Section 9 will provide that the Exchange may halt trading 
in a FLEX Option class pursuant to Options 3, Section 9, and always 
halts trading in a FLEX Option class when trading in a non-FLEX Options 
class with the same underlying equity security or index is halted on 
the Exchange. The System will not accept a FLEX Order for a FLEX Option 
series while trading in a FLEX Option class is halted.\59\
---------------------------------------------------------------------------

    \59\ See Cboe Rule 4.21(a)(3) for materially identical 
provisions.
---------------------------------------------------------------------------

K. Exchange Order Books (Section 10)
    Proposed Section 10 will provide that the Exchange's simple and 
complex order books will not be available for transactions in FLEX 
Options. Accordingly, FLEX Options may only be traded on the Exchange 
by submitting FLEX Orders into a FLEX Electronic Auction pursuant to 
proposed Options 11(b), FLEX PIM pursuant to proposed Options 12, and 
FLEX SOM pursuant to proposed Options 13, each as discussed further 
below. The Exchange notes that its proposal is in line with other 
options exchanges' FLEX rules that do not contemplate the interaction 
of their respective order books with FLEX transactions.\60\
---------------------------------------------------------------------------

    \60\ See e.g., NYSE Arca Rule 5.30-O(c). See also Securities 
Exchange Act Release No. 87235 (October 4, 2019), 84 FR 54671 
(October 10, 2019) (SR-CBOE-2019-084) (among other changes, 
eliminating the availability of an electronic book for FLEX 
Options).
---------------------------------------------------------------------------

L. FLEX Options Trading (Section 11)
    Proposed Section 11 will describe the procedures for FLEX trading 
on the Exchange. Specifically, a FLEX Option series will only be 
eligible for trading if a Member submits a FLEX Order for that series 
into an electronic FLEX Auction pursuant to proposed paragraph (b) of 
Options 11, or submits the FLEX Order to a FLEX PIM or FLEX SOM Auction 
pursuant to proposed Section 12 or Section 13, respectively.\61\
---------------------------------------------------------------------------

    \61\ See proposed Options 3A, Section 11(a), which is based on 
Cboe Rule 5.72(b) except the Exchange is not proposing an open 
outcry FLEX Auction.
---------------------------------------------------------------------------

    Proposed Section 11(a)(1) and (2) will specify the requirements for 
both simple and complex FLEX Orders.
     For a simple FLEX Order, a FLEX Order for a FLEX Option 
series submitted to the System must include all terms for a FLEX Option 
series set forth in proposed Section 3 as described above, size, side 
of the market, and a bid or offer price.\62\ The Exchange also proposes 
that the System will not accept a FLEX Order with identical terms as a 
non-FLEX Option series that is already listed for trading to signify 
that this requirement is System-enforced.
---------------------------------------------------------------------------

    \62\ See Cboe Rule 5.72(b)(1) for similar provisions. The 
Exchange does not have an analogous rule as Cboe Rule 5.7, which 
specifies the different trading sessions during which the system is 
available to receive FLEX orders, and thus has not incorporated the 
applicable language. As noted above, the Exchange will accept FLEX 
Orders entered into an electronic FLEX Auction, FLEX PIM or FLEX SOM 
when the underlying security is open for trading. See proposed 
Options 3A, Section 8.
---------------------------------------------------------------------------

     For a complex FLEX Order, a FLEX Order for a FLEX Option 
complex strategy submitted to the System must satisfy the criteria for 
a complex FLEX Order set forth in proposed Section 7(a) as described 
above, and include size, side of the market, and a net debit or credit 
price. Additionally, each leg of the FLEX Option complex strategy must 
include all terms for a FLEX Option series set forth in proposed 
Section 3.\63\ Similar to simple FLEX Orders, the Exchange proposes to 
System enforce the stipulation that it will not accept a FLEX Option 
complex strategy if a leg in the order has identical terms as a non-
FLEX Option series that is already listed for trading. Additionally, a 
complex FLEX Order submitted into the System for an electronic FLEX 
Auction pursuant to proposed Section 11(b), a FLEX PIM pursuant to 
Section 12, or a FLEX SOM pursuant to Section 13 must include a bid or 
offer price for each leg, which leg prices must add together to equal 
the net price.\64\
---------------------------------------------------------------------------

    \63\ See Cboe Rule 5.72(b)(2) for similar provisions. As noted 
above for simple FLEX Orders, the Exchange does not have an 
analogous rule as Cboe Rule 5.7, and thus has not incorporated the 
applicable language. See supra note 62.
    \64\ See proposed Options 3A, Section 11(a)(2)(A), which is 
based on Cboe Rule 5.72(b)(2)(A) except the Exchange will also add 
references to FLEX PIM and FLEX SOM for accuracy and completeness.
---------------------------------------------------------------------------

    Proposed Section 11(b) will describe the electronic FLEX Auction. 
The proposed FLEX Auction will be substantially similar to Cboe's 
electronic FLEX Auction set forth in Cboe Rule 5.72(c), except for 
certain intended differences as further described below.\65\ 
Specifically, a Member may electronically submit a FLEX Order (simple 
or complex) into an electronic FLEX Auction for execution pursuant to 
this paragraph (b). Pursuant to proposed subparagraph (b)(1), a FLEX 
Auction may be initiated if all of the below conditions in proposed 
subparagraph (b)(1)(A)-(G) are met; otherwise, the System rejects or 
cancels a FLEX Order that does not meet the conditions in this 
subparagraph (b)(1).\66\
---------------------------------------------------------------------------

    \65\ See also Securities Exchange Act Release No. 87235 (October 
4, 2019), 84 FR 54671 (SR-CBOE-2019-084) (October 10, 2019) 
(adopting an electronic FLEX Auction on Cboe, among other changes).
    \66\ Proposed paragraph (b) is based on Cboe Rule 5.72(c). The 
proposed eligibility requirements for the FLEX Auction in 
subparagraph (b)(1) are similar to Cboe Rule 5.72(c)(1), except as 
noted below.
---------------------------------------------------------------------------

     Class: The FLEX Order is in a class of options the 
Exchange is authorized to list for trading on the Exchange.
     Size: There is no minimum size for FLEX Orders.
     Terms: A simple or complex FLEX Order must comply with 
proposed Section 11(a).
     Price: The bid or offer price, or the net debit or credit 
price, as applicable, of the FLEX Order is the ``auction price.''
     Time: A FLEX Order may only be submitted for electronic 
execution in a FLEX Auction after FLEX trading has opened pursuant to 
proposed Section 8.
     Exposure Interval: The submitting Member must designate 
the length of the ``exposure interval,'' which must be between three 
seconds and five minutes.\67\ If the designated time

[[Page 22299]]

exceeds the market close, then the FLEX Auction will end at the market 
close with an execution, if an execution is permitted pursuant to 
proposed Section 11(b).\68\
---------------------------------------------------------------------------

    \67\ There will be no default setting to the FLEX Auction 
exposure interval. As such, Members will be required to specify the 
exposure interval; otherwise, their FLEX Order will be rejected by 
the System.
    \68\ Cboe Rule 5.72(c)(1)(F) does not specify whether an 
execution would occur (if permitted) when the designated time 
exceeds the market close, and only expressly prohibits the 
designated time from going beyond the market close. While the 
Exchange's rules are silent in this regard, the Exchange notes that 
its proposal will follow current non-FLEX auction behavior, 
including current PIM and SOM behavior. In doing so, the Exchange's 
proposal will promote executions in electronic FLEX Auctions and 
also prevent executions after the market close.
---------------------------------------------------------------------------

     Minimum Increment: The price of a simple FLEX Order must 
be in an increment the Exchange determines on a class basis (which may 
not be smaller than the amounts set forth in proposed Section 5 (i.e., 
$0.01)). If the FLEX Order is a complex order, the price must be a net 
price for the complex strategy.\69\ The foregoing rule proposal will be 
substantially similar to the minimum increment requirements in Cboe 
Rules 5.73(a)(5) and 5.74(a)(5). While the Exchange will align to 
Cboe's minimum increment requirements (i.e., $0.01) for the individual 
options legs of a complex FLEX Order entered into a FLEX Auction, the 
Exchange also proposes to align the minimum increment requirements for 
stock-tied FLEX complex strategies with the existing requirements for 
stock-tied non-FLEX complex strategies as set forth in Options 3, 
Section 14(c)(1). As such, proposed Options 3A, Section 11(b)(1)(G) 
will further provide that the prices of Complex Options Strategies (as 
defined in Options 3, Section 14) may be expressed in one cent ($0.01) 
increments, and the options leg of Complex Options Strategies may be 
executed in one cent ($0.01) increments, regardless of the minimum 
increments otherwise applicable to the individual options legs of the 
order. Prices of Stock-Option Strategies or Stock-Complex Strategies 
(each as defined in Options 3, Section 14) may be expressed in any 
decimal price determined by the Exchange,\70\ and the stock leg of a 
Stock-Option Strategy or Stock-Complex Strategy may be executed in any 
decimal price permitted in the equity market. The options leg of a 
Stock-Option Strategy or Stock-Complex Strategy may be executed in one 
cent ($0.01) increments, regardless of the minimum increments otherwise 
applicable to the individual options legs of the order. Similar to 
stock-tied complex orders today, the Exchange believes that smaller 
minimum increments are appropriate for complex FLEX Orders that contain 
a stock component as the stock component can trade at finer decimal 
increments permitted by the equity market.
---------------------------------------------------------------------------

    \69\ See proposed subparagraph (G) of Section 11(b)(1). While 
Cboe's electronic FLEX Auction eligibility requirements in Rule 
5.72(c)(1) are silent on minimum increments, the eligibility 
requirements for Cboe's FLEX AIM and FLEX SAM in Cboe Rules 
5.73(a)(5) and 5.74(a)(5), respectively, address minimum increments. 
The Exchange believes it will be helpful to add a similar 
requirement for electronic FLEX Auctions for greater consistency and 
clarity. The Exchange also notes that unlike Cboe, it is not 
proposing to allow exercise prices to be expressed as percentages, 
and will therefore not incorporate the applicable provisions. As 
discussed above, the Exchange is also incorporating within proposed 
subparagraph (G) the minimum increment provisions for non-FLEX 
complex orders that are stock-tied from Options 3, Section 14(c)(1).
    \70\ The minimum increment for Stock-Option Strategies and 
Stock-Complex Strategies can currently be expressed to four decimal 
places.
---------------------------------------------------------------------------

    Proposed subparagraph (b)(2) of Options 11 will describe the FLEX 
Auction process, and will provide that upon receipt of a FLEX Order 
that meets the conditions in subparagraph (a) as described above, the 
FLEX Auction commences. Proposed subparagraph (b)(2)(A) will describe 
the contents of the FLEX Auction message, and will provide that the 
System initiates a FLEX Auction by sending a FLEX Auction notification 
message to Members detailing the FLEX Option series or complex strategy 
(as applicable), side, size, auction ID,\71\ capacity, and exposure 
interval. FLEX Auction notification messages are not disseminated to 
OPRA.\72\ Like Cboe, the FLEX Auction message will not include the 
price of the auctioned FLEX Order. The Exchange believes not including 
the auction price in the notification message will encourage Members to 
respond with the best prices at which they are willing to trade against 
the auctioned FLEX Order. If the message included the price, Members 
may only respond to trade at that price; without the price, Members may 
respond at better prices, which may result in price improvement 
opportunities for the auctioned FLEX Order.
---------------------------------------------------------------------------

    \71\ As discussed below, this information on the proposed 
auction message will permit responses to only execute at the 
conclusion of the auction into which the responses were submitted.
    \72\ See Cboe Rule 5.72(c)(2)(A) for similar provisions, except 
with respect to the exposure interval and Attributable designation. 
The Exchange will simply disseminate the duration of the exposure 
interval, instead of calculating and disseminating what time the 
auction will conclude like Cboe. In addition, the Exchange is not 
proposing to offer an Attributable designation for FLEX Orders like 
Cboe does today.
---------------------------------------------------------------------------

    Proposed subparagraph (b)(2)(B) will provide that one or more FLEX 
Auctions in the same FLEX Option series or complex strategy (as 
applicable) may occur at the same time. To the extent there is more 
than one FLEX Auction in a FLEX Option series or complex strategy (as 
applicable) underway at the same time, the FLEX Auctions conclude 
sequentially based on the times at which each FLEX Auction's exposure 
interval concludes. At the time each FLEX Auction concludes, the System 
allocates the FLEX Order pursuant to proposed subparagraph (3) and 
takes into account all FLEX responses submitted during the exposure 
interval.\73\ Generally, if a Member attempts to initiate an electronic 
FLEX Auction in a FLEX Option series while another auction in that 
series is ongoing, the Exchange believes it will provide that second 
FLEX Order with an opportunity for execution in a timely manner by 
initiating another FLEX Auction, rather than having the Member wait for 
the first auction to conclude. The second Member may not be able to 
submit a response to trade in the ongoing FLEX Auction, because the 
terms may not be consistent with that Member's order (for example, 
there may not be sufficient size, and the Member may only receive a 
share of the auctioned order depending on other responses). Therefore, 
the Exchange believes providing this proposed functionality may 
encourage Members to use electronic FLEX Auctions to execute their FLEX 
Orders.
---------------------------------------------------------------------------

    \73\ See Cboe Rule 5.72(c)(2)(B) for materially identical 
provisions.
---------------------------------------------------------------------------

    Proposed subparagraph (b)(2)(C) will provide that the submitting 
Member may cancel a FLEX Auction prior to the end of the exposure 
interval.\74\ Proposed subparagraph (b)(2)(D) will specify the 
conditions for submitting responses to a FLEX Auction. Any Member 
(including the submitting Member) may submit responses to a FLEX 
Auction that are properly marked specifying the FLEX Option series or 
complex strategy (as applicable), bid or offer price or net price 
(respectively), size, side of the market, and the auction ID for the 
FLEX Auction to which the Member is submitting the response. A FLEX 
response may only participate in the FLEX Auction with the auction ID 
specified in the response, which is why the auction notification 
message described above will include an auction ID and responses must 
identify the applicable auction ID.\75\ If there are concurrent FLEX 
Auctions occurring, a Member may submit responses to all

[[Page 22300]]

ongoing auctions, and thus concurrent auctions will not hinder a 
Member's ability to participate in any FLEX Auction.
---------------------------------------------------------------------------

    \74\ See Cboe Rule 5.72(c)(2)(C) for materially identical 
provisions.
    \75\ See Cboe Rule 5.72(c)(2)(D) for materially identical 
provisions.
---------------------------------------------------------------------------

    A Member using the same badge/ \76\ mnemonic \77\ may only submit a 
single FLEX response per auction ID to a FLEX Auction. If an additional 
FLEX response is submitted for the same auction ID from the same badge/
mnemonic, then that FLEX response will automatically replace the 
previous FLEX response.\78\ The System caps the size of a FLEX response 
for the same badge/mnemonic at the size of the FLEX Order (i.e., the 
System ignores the size in excess of the size of the FLEX Order when 
processing the FLEX Auction).\79\ Given that the Exchange is proposing 
below to apply a pro-rata allocation methodology to executions at the 
conclusion of the FLEX Auction, this provision is intended to prevent a 
Member from submitting a response with an extremely large size into the 
electronic FLEX Auction in order to obtain a larger pro-rata share of 
the FLEX Order.
---------------------------------------------------------------------------

    \76\ A ``badge'' shall mean an account number, which may contain 
letters and/or numbers, assigned to Market Makers. A Market Maker 
account may be associated with multiple badges. See Options 1, 
Section 1(a)(5).
    \77\ A ``mnemonic'' shall mean an acronym comprised of letters 
and/or numbers assigned to Electronic Access Members. An Electronic 
Access Member account may be associated with multiple mnemonics. See 
Options 1, Section 1(a)(23).
    \78\ See proposed Options 3A, Section 11(b)(2)(D)(i), which is 
based on Cboe Rule 5.72(c)(2)(D)(i) except the Exchange will not 
allow Members to submit multiple FLEX responses using the same 
badge/mnemonic, and will not aggregate all of the Member's FLEX 
responses. While not specified in the Exchange's current rules, this 
is consistent with current auction behavior, including current PIM 
and SOM behavior.
    \79\ See proposed Options 3A, Section 11(b)(2)(D)(ii), which is 
based on Cboe Rule 5.72(c)(2)(D)(ii) except the Exchange will not 
aggregate all of the Member's FLEX responses. See supra note 78.
---------------------------------------------------------------------------

    Further, FLEX responses must be on the opposite side of the market 
as the FLEX Order. The System rejects a FLEX response on the same side 
of the market as the FLEX Order.\80\ FLEX responses are not visible to 
Members or disseminated to OPRA.\81\ This is consistent with how Cboe 
treats FLEX responses pursuant to Cboe Rule 5.72(c)(2)(D)(iv). The 
proposed rule change is also consistent with the Exchange's existing 
auctions, in which responses are not visible to the market.\82\ 
Responses to electronic auctions are not firm prior to the conclusion 
of the auction, at which time their price and size are firm. For the 
same reason as the Exchange is proposing not to disseminate the auction 
price on the auction notification message as discussed above, the 
Exchange believes it will encourage Members to submit responses at 
their best possible price if they do not know the prices at which other 
Members are willing to trade.\83\
---------------------------------------------------------------------------

    \80\ See proposed Options 3A, Section 11(b)(2)(D)(iii), which is 
based on Cboe Rule 5.72(c)(2)(D)(iii).
    \81\ See proposed Options 3A, Section 11(b)(2)(D)(iv), which is 
based on Cboe Rule 5.72(c)(2)(D)(iv).
    \82\ See Supplementary Material .02 to Options 3, Section 11; 
and Options 3, Section 13(c)(4).
    \83\ For example, if during a FLEX Auction of a buy FLEX Order, 
a Member submitted a response to sell at $1.05, if another Member 
saw that response, it may merely respond to sell at $1.05, or maybe 
$1.04, even though it may ultimately be willing to sell at $1.03. 
Without seeing the other responses, the second Member may instead 
submit a response to sell at $1.03, which could result in price 
improvement for the auctioned order.
---------------------------------------------------------------------------

    A Member may modify or cancel it FLEX Responses during the exposure 
interval.\84\ The minimum price increment for FLEX responses is the 
same as the one the Exchange determines for a class pursuant to 
proposed subparagraph (b)(1)(G) above. A response to a FLEX Auction of 
a complex order must have a net price. The System rejects a FLEX 
response that is not in the applicable minimum increment.\85\
---------------------------------------------------------------------------

    \84\ See proposed Options 3A, Section 11(b)(2)(D)(v), which is 
based on Cboe Rule 5.72(c)(2)(D)(v).
    \85\ See proposed Options 3A, Section 11(b)(2)(D)(vi). While 
Cboe's electronic FLEX Auction response requirements in Rule 
5.72(c)(2)(D) are silent on minimum increments, the response 
requirements for Cboe's FLEX AIM and FLEX SAM in Cboe Rules 
5.73(c)(5)(A) and 5.74(c)(5)(A), respectively, have similar 
provisions. The Exchange believes it will be helpful to add a 
similar requirement for electronic FLEX Auction responses for 
greater consistency and clarity. The Exchange also notes that unlike 
Cboe, it is not proposing to allow percentage formats for exercise 
prices of FLEX Options, and will therefore not incorporate the 
applicable provisions.
---------------------------------------------------------------------------

    Pursuant to proposed subparagraph (b)(3) of Section 11, the FLEX 
Auction concludes at the end of the exposure interval, unless the 
Exchange halts trading in the affected series or the submitting Member 
cancels the FLEX Auction, in which case the FLEX Auction concludes 
without execution.\86\ At the conclusion of the FLEX Auction:
---------------------------------------------------------------------------

    \86\ See Cboe Rule 5.72(c)(3) for materially identical 
provisions.
---------------------------------------------------------------------------

     Pursuant to proposed subparagraph (b)(3)(A), the System 
executes the FLEX Order against the FLEX responses at the best 
price(s), to the price at which the balance of the FLEX Order or the 
FLEX responses can be fully executed (the ``final auction price''). For 
purposes of ranking FLEX responses when determining how to allocate a 
FLEX Order, the term ``price'' refers to the dollar and decimal amount 
of the response bid or offer.\87\
---------------------------------------------------------------------------

    \87\ See Cboe Rule 5.72(c)(3)(A) for similar provisions, except 
the Exchange is not proposing to allow percentage values of the 
response bid or offer.
---------------------------------------------------------------------------

     Pursuant to proposed subparagraph (b)(3)(A)(i), if there 
are multiple FLEX responses at the same price level, then the contracts 
in those FLEX responses are allocated proportionally according to Size 
Pro-Rata Priority \88\ with Priority Customer overlay \89\ (as 
described in Options 3, Section 10(c)). The Exchange notes that this is 
similar to Cboe Rule 5.72(c)(3)(A)(i), except Cboe applies no overlays 
to its size pro-rata allocation methodology whereas the Exchange will 
apply an overlay for Priority Customers on top of its standard size 
pro-rata allocation methodology. This is consistent with the Exchange's 
standard allocation methodology in its auctions for non-FLEX 
Options.\90\
---------------------------------------------------------------------------

    \88\ Size Pro-Rata Priority shall mean that if there are two or 
more resting orders or quotes at the same price, the System 
allocates contracts from an incoming order or quote to resting 
orders and quotes beginning with the resting order or quote 
displaying the largest size proportionally according to displayed 
size, based on the total number of contracts displayed at that 
price. See Options 3, Section 10(c).
    \89\ Priority Customer overlay mean that the highest bid and 
lowest offer shall have priority except that Priority Customer 
orders shall have priority over non- Priority Customer interest at 
the same price in the same options series. If there are two or more 
Priority Customer orders for the same options series at the same 
price, priority shall be afforded to such Priority Customer orders 
in the sequence in which they are received by the System. See 
Options 10, Section 10(c)(1)(A).
    \90\ See, e.g., Options 3, Section 11(d)(3)(C) (SOM allocation 
methodology) and Options 3, Section 13(d) (PIM allocation 
methodology).
---------------------------------------------------------------------------

     Pursuant to proposed subparagraph (b)(3)(A)(ii), the 
executable quantity is allocated to the nearest whole number, with 
fractions rounded up for the FLEX response with the higher quantity. 
Further, proposed subparagraph (b)(3)(A)(iii) will provide that if an 
allocation would result in less than one contract, then one contract 
will be allocated. The Exchange is not adopting the rounding and 
allocation language in Cboe Rule 5.72(c)(3)(A)(ii) and (iii), but is 
rather adopting language that is consistent with its current rounding 
and allocation methodology as the Exchange does not allocate fractional 
contracts and instead rounds up to the nearest whole number.\91\
---------------------------------------------------------------------------

    \91\ See Options 3, Section 10(c), Supplementary Material .09 to 
Options 3, Section 11, and Supplementary Material .10 to Options 3, 
Section 13.
---------------------------------------------------------------------------

    Pursuant to proposed subparagraph (b)(3)(B), the System cancels an 
unexecuted FLEX Order (or unexecuted portion).\92\ Further, proposed

[[Page 22301]]

subparagraph (b)(3)(C) will provide that the System cancels any 
unexecuted responses (or unexecuted portions).\93\
---------------------------------------------------------------------------

    \92\ See Cboe Rule 5.72(c)(3)(B) for materially identical 
provisions.
    \93\ See Cboe Rule 5.72(c)(3)(C) for materially identical 
provisions.
---------------------------------------------------------------------------

M. FLEX PIM (Section 12)
    The Exchange proposes to establish PIM auction functionality for 
FLEX Options in Options 3A, Section 12. The proposed FLEX PIM auction 
will be substantially similar to Cboe's FLEX AIM in Cboe Rule 5.73, 
except for certain intended differences as further described below. 
Pursuant to proposed Section 12, a Member (the ``Initiating Member'') 
may electronically submit for execution an order (which may be a simple 
or complex order) it represents as agent (``Agency Order'') against 
principal interest or a solicited order(s) (except, if the Agency Order 
is a simple order, for an order for the account of any FLEX Market 
Maker with an appointment in the applicable FLEX Option class on the 
Exchange) (an ``Initiating Order''), provided it submits the Agency 
Order for electronic execution into a FLEX PIM auction pursuant to this 
Rule.\94\
---------------------------------------------------------------------------

    \94\ See Cboe Rule 5.73 for similar provisions, except the 
Exchange will not incorporate the reference to FLEX SPX as this is a 
Cboe-specific product.
---------------------------------------------------------------------------

    Proposed Section 12(a)(1)-(5) will set forth the FLEX PIM auction 
eligibility requirements. Specifically, the Initiating Member may 
initiate a FLEX PIM auction if all of the following conditions are met:
     Class. An Agency Order must in a FLEX Option class the 
Exchange designates as eligible for FLEX PIM auctions.
     FLEX Option Series. The Agency Order and Initiating Order 
must each be a FLEX Order that complies with proposed Section 11(a) in 
a permissible FLEX Option series that complies with proposed Section 
3(b).
     Marking. The Initiating Member must mark an Agency Order 
for FLEX PIM auction processing.
     Size. There will be no minimum size for Agency Orders. The 
Initiating Order must be for the same size as the Agency Order.
     Minimum Increment. The price of the Agency Order and 
Initiating Order for simple FLEX Orders must be in an increment the 
Exchange determines on a class basis (which may not be smaller than the 
amounts set forth in Section 5 above). If the Agency Order and 
Initiating Order are complex orders, the price must be a net price for 
the complex strategy.\95\ While the Exchange will align to Cboe's 
minimum increment requirements (i.e., $0.01) for the individual options 
legs of a complex FLEX Order entered into a FLEX PIM, the Exchange also 
proposes to align the minimum increment requirements for stock-tied 
FLEX complex strategies with the existing requirements for stock-tied 
non-FLEX complex strategies as set forth in Options 3, Section 
14(c)(1). As such, proposed Options 3A, Section 12(a)(5) will further 
provide that the prices of Complex Options Strategies (as defined in 
Options 3, Section 14) may be expressed in one cent ($0.01) increments, 
and the options leg of Complex Options Strategies may be executed in 
one cent ($0.01) increments, regardless of the minimum increments 
otherwise applicable to the individual options legs of the order. 
Prices of Stock-Option Strategies or Stock-Complex Strategies (each as 
defined in Options 3, Section 14) may be expressed in any decimal price 
determined by the Exchange,\96\ and the stock leg of a Stock-Option 
Strategy or Stock-Complex Strategy may be executed in any decimal price 
permitted in the equity market. The options leg of a Stock-Option 
Strategy or Stock-Complex Strategy may be executed in one cent ($0.01) 
increments, regardless of the minimum increments otherwise applicable 
to the individual options legs of the order. Similar to stock-tied 
complex orders today, the Exchange believes that smaller minimum 
increments are appropriate for complex FLEX Orders that contain a stock 
component as the stock component can trade at finer decimal increments 
permitted by the equity market.
---------------------------------------------------------------------------

    \95\ The Exchange notes that unlike Cboe, it will not allow 
prices to be entered as a percentage value, and therefore will not 
incorporate the applicable language from Cboe Rule 5.73(a)(5) into 
proposed Section 12(a)(5). As discussed above, the Exchange will 
also add existing complex order minimum increment requirements in 
Options 3, Section 14(c)(1) to align the proposed FLEX functionality 
with non-FLEX functionality.
    \96\ The minimum increment for Stock-Option Strategies and 
Stock-Complex Strategies can currently be expressed to four decimal 
places.
---------------------------------------------------------------------------

     Time. An Initiating Member may only submit an Agency Order 
to a FLEX PIM auction after trading in FLEX Options is open pursuant to 
proposed Section 8.
    The System will reject or cancel both an Agency Order and 
Initiating Order submitted to a FLEX PIM auction that do not meet the 
conditions in proposed paragraph (a) as described above. The proposed 
FLEX PIM eligibility requirements in proposed Section 12(a) are 
substantially similar to Cboe's FLEX AIM eligibility requirements in 
Cboe Rule 5.73(a), except with respect to the language related to the 
percentage value, as noted above.
    Pursuant to proposed Section 12(b), the Initiating Order must stop 
the entire Agency Order at a specified price. If the Agency Order and 
Initiating Order are Complex Orders, the price must be a net price for 
the complex strategy.\97\ In particular, the Initiating Member must 
specify either of the below; otherwise, the System will reject or 
cancel both an Agency Order and Initiating Order submitted to a FLEX 
PIM auction that do not meet the conditions in this proposed paragraph 
(b).
---------------------------------------------------------------------------

    \97\ See Cboe Rule 5.73(b) for similar provisions, except the 
Exchange will not allow prices to be entered as a percentage value, 
and therefore will not incorporate the applicable language from 
Cboe's rule into proposed Section 12(b).
---------------------------------------------------------------------------

     Pursuant to proposed subparagraph (b)(1), a single price 
at which it seeks to execute the Agency Order against the Initiating 
Order (a ``single-price submission''), including whether it elects to 
have less than its guaranteed allocation (as described in proposed 
Section 12(e)(4) below). This is similar to Cboe Rule Rule 5.73(b)(1), 
except the Exchange is not proposing to allow Initiating Members to 
elect for the Initiating Order to have last priority to trade against 
the Agency Order, and will instead allow them to elect less than their 
guaranteed allocation. As further discussed below, the proposed 
guaranteed allocation option will be based on the guaranteed allocation 
option available in non-FLEX PIM auctions, and therefore the proposed 
rule change will provide further consistency across the Exchange's 
auction mechanisms.
     Pursuant to subparagraph (b)(2), an initial stop price and 
instruction to automatically match the price and size of all FLEX PIM 
responses (``auto-match'') at each price, up to a designated limit 
price, better than the price at which the balance of the Agency Order 
can be fully executed (the ``final auction price''). This is materially 
identical to Cboe Rule 5.73(b)(2).
    Proposed Section 12(c) will govern the FLEX PIM auction process. 
Specifically, upon receipt of an Agency Order that meets the conditions 
in paragraphs (a) and (b) as described above, the FLEX PIM auction 
process commences. Proposed subparagraphs (c)(1)(A) and (B) will 
describe concurrent FLEX PIM auctions for simple Agency Orders and 
complex Agency Orders, respectively. One or more FLEX PIM auctions in 
the same FLEX Option series or same complex strategy (as applicable) 
may occur at the

[[Page 22302]]

same time.\98\ To the extent there is more than one FLEX PIM auction in 
a FLEX Option series or complex strategy (as applicable) underway at 
the same time, the FLEX PIM auctions will conclude sequentially based 
on the times at which the FLEX PIM auction periods end. At the time 
each FLEX PIM auction concludes, the System allocates the Agency Order 
pursuant to proposed paragraph (e) as described below, and takes into 
account all FLEX PIM responses received during the FLEX PIM auction 
period. The concurrent FLEX PIM auction feature in proposed Section 
12(c)(1)(A) and (B) is materially identical to Cboe Rule 5.73(c)(1)(A) 
and (B), and is also consistent with the concurrent auction feature 
proposed above for FLEX Auctions. Similar to FLEX Auctions as proposed 
above, if a Member attempts to initiate a FLEX PIM Auction in a FLEX 
Option series while another auction in that series in ongoing, the 
Exchange believes it will provide that second FLEX Order with an 
opportunity for execution in a timely manner by initiating another FLEX 
PIM Auction, rather than requiring the Member to wait for the first 
auction to conclude. The second Member may not be able to submit a 
response to trade in the ongoing FLEX PIM Auction because the terms may 
not be consistent with that Member's order (for example, there may not 
be sufficient size, and the Member may only receive a share of the 
auctioned order depending on other responses). Therefore, the Exchange 
believes that providing this functionality for FLEX PIM may provide 
additional opportunities for execution of FLEX Orders by encouraging 
Members to use FLEX PIM.
---------------------------------------------------------------------------

    \98\ Further, for complex Agency Orders, PIM auctions in 
different complex strategies may be ongoing at any given time, even 
if the complex strategies have overlapping components. A FLEX PIM 
auction in a complex strategy may be ongoing at the same time as a 
FLEX PIM auction in any component of the complex strategy. See 
proposed subparagraph (c)(1)(B)(i) of Options 3A, Section 12.
---------------------------------------------------------------------------

    Pursuant to proposed Section 12(c)(2), the System initiates the 
FLEX PIM auction process by sending a FLEX PIM auction notification 
message detailing the side, size, auction ID, the length of the FLEX 
PIM auction period, and FLEX Option series or complex strategy, as 
applicable, of the Agency Order to all Members that elect to receive 
FLEX PIM auction notification messages. The Exchange may also determine 
to include the stop price in FLEX PIM auction notification messages, 
which will apply to all FLEX PIM auctions. FLEX PIM auction 
notification messages will not be disseminated to OPRA.\99\
---------------------------------------------------------------------------

    \99\ See Cboe Rule 5.73(c)(2) for substantially similar 
provisions except the Exchange will not incorporate the reference to 
SPX as it does not list this symbol.
---------------------------------------------------------------------------

    Proposed Section 12(c)(3) will describe the ``FLEX PIM Auction 
period,'' and is based on Cboe Rule 5.73(c)(3). The FLEX PIM Auction 
period will be defined as a period of time that must be designated by 
the Initiating Member, which may be no less than three seconds and no 
more than five minutes. Similar to the exposure interval for electronic 
FLEX Auctions in Section 11(b) discussed above, the Initiating Member 
will be required to identify a length of time within the specified 
parameters for FLEX PIM as there will be no default for the FLEX PIM 
Auction period. Otherwise, their FLEX Order will be rejected by the 
System. Further, if the designated length of the FLEX PIM Auction 
period exceeds the market close, then the auction will end at the 
market close with an execution, if an execution is permitted by this 
Section 12. Cboe's rule does not specify whether an execution (if 
permitted) would occur if the designated length exceeds the market 
close. However, the Exchange's non-FLEX auctions currently allow 
executions (as permitted by their respective rules) to occur in such 
scenarios, so the Exchange proposes to be consistent with current 
System functionality in this regard.\100\ In doing so, the Exchange's 
proposal will promote executions in FLEX PIM and also prevent 
executions after the market close.
---------------------------------------------------------------------------

    \100\ While this behavior is not explicitly stated in the 
current Rules, the Exchange's proposal will be consistent with 
current non-FLEX auction behavior, including current PIM and SOM 
behavior.
---------------------------------------------------------------------------

    Proposed Section 12(c)(4) will provide that an Initiating Member 
may not modify or cancel an Agency Order or Initiating Order after 
submission to a FLEX PIM auction, except to improve the price of the 
Initiating Order. This will be similar to Cboe Rule 5.73(c)(4) except 
unlike Cboe, the Exchange will allow a limited exception by allowing 
Initiating Members to improve the price of their Initiating Orders. The 
Exchange notes that this will align to current non-FLEX PIM behavior, 
which allows entering Members to modify their Counter-Side Orders \101\ 
upon entry into the PIM by improving upon the initial price of the 
Counter-Side Order.\102\
---------------------------------------------------------------------------

    \101\ Counter-Side Orders for PIM are the equivalent to 
Initiating Orders for FLEX PIM. See Options 3, Section 13(b) for a 
description of Counter-Side Orders.
    \102\ See Options 3, Section 13(b)(5) as modified by SR-ISE-
2023-06 (not yet implemented) (providing that the Crossing 
Transaction may not be canceled or modified, but the price of the 
Counter-Side Order may be improved during the exposure period).
---------------------------------------------------------------------------

    Proposed Section 12(c)(5) will govern the requirements for FLEX PIM 
responses. Specifically:
     Any Member other than the Initiating Member (the System 
rejects a response with the same badge/mnemonic as the Initiating 
Order) may submit responses to a FLEX PIM auction that are properly 
marked specifying price, size, side, and the auction ID for the FLEX 
PIM auction to which the Member is submitting the response. A FLEX PIM 
response may only participate in the FLEX PIM auction with the auction 
ID specified in the response.\103\
---------------------------------------------------------------------------

    \103\ See proposed Options 3A, Section 12(c)(5), which is based 
on Cboe Rule 5.73(c)(5).
---------------------------------------------------------------------------

     The minimum price increment for FLEX PIM responses is the 
same as the one the Exchange determines for a class pursuant to 
proposed Section 12(a)(5) above. A response to a FLEX PIM auction of a 
complex Agency Order must have a net price. The System will reject a 
FLEX PIM response that is not in the applicable minimum increment.\104\
---------------------------------------------------------------------------

    \104\ See proposed Options 3A, Section 12(c)(5)(A), which is 
based on Cboe Rule 5.73(c)(5)(A) except the Exchange will not allow 
prices to be expressed as a percentage value. Further, the Exchange 
will not incorporate the Cboe rule portions on Index Combo Orders as 
the Exchange does not offer this functionality.
---------------------------------------------------------------------------

     A Member using the same badge/mnemonic may only submit a 
single FLEX PIM response per auction ID for a given auction. If an 
additional FLEX PIM response is submitted for the same auction ID from 
the same badge/mnemonic, then that FLEX PIM response will automatically 
replace the previous FLEX PIM response.\105\
---------------------------------------------------------------------------

    \105\ See proposed Options 3A, Section 12(c)(5)(B), which will 
be different from Cboe Rule 5.73(c)(5)(B) because the Exchange will 
not allow Members to submit multiple FLEX PIM responses using the 
same badge/mnemonic, and will not aggregate all of the Member's FLEX 
PIM responses. While the rules are currently silent in this regard, 
this will align to current non-FLEX auction behavior, including PIM 
auction behavior.
---------------------------------------------------------------------------

     The System will cap the size of a FLEX PIM response at the 
size of the Agency Order (i.e., the System will ignore size in excess 
of the size of the Agency Order when processing the FLEX PIM 
auction).\106\
---------------------------------------------------------------------------

    \106\ See proposed Options 3A, Section 12(c)(5)(C), which is 
based on Cboe Rule 5.73(c)(5)(C) except the Exchange will not allow 
Members to submit multiple FLEX PIM responses using the same badge/
mnemonic, and will not aggregate all of the Member's FLEX PIM 
responses. As noted above, this will align to current non-FLEX 
auction functionality, including PIM auction functionality in 
Options 3, Section 13.
---------------------------------------------------------------------------

     FLEX PIM responses must be on the opposite side of the 
market as the

[[Page 22303]]

Agency Order. The System rejects a FLEX PIM response on the same side 
of the market as the Agency Order.\107\
---------------------------------------------------------------------------

    \107\ See proposed Options 3A, Section 12(c)(5)(D), which is 
materially identical to Cboe Rule 5.73(c)(5)(D).
---------------------------------------------------------------------------

     FLEX PIM responses will not be visible to PIM auction 
participants or disseminated to OPRA.\108\
---------------------------------------------------------------------------

    \108\ See proposed Options 3A, Section 12(c)(5)(E), which is 
materially identical to Cboe Rule 5.73(c)(5)(E).
---------------------------------------------------------------------------

     A Member may modify or cancel its FLEX PIM responses 
during the FLEX PIM auction.\109\
---------------------------------------------------------------------------

    \109\ See proposed Options 3A, Section 12(c)(5)(F), which is 
materially identical to Cboe Rule 5.73(c)(5)(F).
---------------------------------------------------------------------------

    Pursuant to proposed Section 12(d), a FLEX PIM auction concludes at 
the earliest to occur of the following times: (1) the end of the FLEX 
PIM auction period; and (2) any time the Exchange halts trading in the 
affected series, provided, however, that in such instance the FLEX PIM 
auction concludes without execution.\110\
---------------------------------------------------------------------------

    \110\ See Cboe Rule 5.73(d) for materially identical provisions.
---------------------------------------------------------------------------

    Proposed Section 12(e) will govern how executions will occur in 
FLEX PIM. In particular, at the end of the FLEX PIM auction, the System 
allocates the Initiating Order or FLEX PIM responses against the Agency 
Order at the best price(s), to the price at which the balance of the 
Agency Order can be fully executed (the ``final auction price''), as 
follows. For purposes of ranking the Initiating Order and FLEX PIM 
responses when determining how to allocate the Agency Order against the 
Initiating Order and those responses, the term ``price'' refers to the 
dollar and decimal amount of the order or response bid or offer.\111\ 
Proposed subparagraphs (e)(1)-(4) details the FLEX PIM allocation 
methodology for the following scenarios:
---------------------------------------------------------------------------

    \111\ See Cboe Rule 5.73(e) for similar provisions except the 
Exchange will not allow prices to be expressed as a percentage 
value.
---------------------------------------------------------------------------

     No Price Improvement: If the FLEX PIM auction results in 
no price improvement, the System executes the Agency Order at the stop 
price in the following order:
     Priority Customer responses (in time priority); \112\
---------------------------------------------------------------------------

    \112\ See proposed Section 12(e)(1)(A), which is materially 
identical to Cboe Rule 5.73(e)(1)(A).
---------------------------------------------------------------------------

     The Initiating Order for the greater of (1) one contract 
or (2) up to 50% of the Agency Order if there is a response(s) from one 
other Member at the same price or 40% of the Agency Order if there are 
responses from two or more other Members at the same price (which 
percentages are based on the original size of the Agency Order).\113\ 
Unless there are remaining contracts after including all PIM responses, 
under no circumstances does the Initiating Member receive an allocation 
percentage at the final auction price of more than 50% of the initial 
Agency Order in the event there is a response(s) from one other Member 
or 40% of the initial Agency Order in the event there are responses 
from two or more other Members, except when rounding up. The Exchange 
is specifying two limited scenarios in this Rule where the Initiating 
Member may receive an allocation percentage greater than its guaranteed 
allocation percentage, which is either when there are remaining 
contracts after including all PIM responses or when rounding up.\114\ 
As an example of the first scenario, assume an Initiating Member 
submitted a FLEX Order for 20 contracts into FLEX PIM and there are 2 
PIM responses (one for 3 contracts and one for 4 contracts). After the 
7 PIM responses are allocated, the Initiating Member would then receive 
the remaining 13 contracts (which is more than their 40% allocation 
percentage) because there are remaining contracts after all PIM 
responses are included.
---------------------------------------------------------------------------

    \113\ See proposed Section 12(e)(1)(B)(ii), which is based on 
Cboe Rule 5.73(e)(1)(B)(ii) except the percentages will be based on 
the original size of the Agency Order, instead of the number of 
contracts remaining after execution against Priority Customer 
responses like Cboe. This will align to current PIM functionality. 
See Options 3, Section 13(d)(3). See infra note 121 for further 
discussion on allocation percentages.
    \114\ See proposed Section 12(e)(1)(B), which is based on Cboe 
Rule 5.73(e)(1)(B) except with respect to the two limited scenarios 
discussed above. This behavior will align to current PIM 
functionality. While the Exchange's rules are silent on the first 
scenario, the rounding up scenario is specified in Options 3, 
Section 13(d)(7).
---------------------------------------------------------------------------

     All other FLEX PIM responses, allocated on a Size Pro-Rata 
basis (as defined in Options 3, Section 10(c)); \115\ and
---------------------------------------------------------------------------

    \115\ See proposed Section 12(e)(1)(C), which is materially 
identical to Cboe Rule 5.73(e)(1)(C). The Exchange notes that Size 
Pro-Rata (as defined in Options 3, Section 10(c)) is similar to pro-
rata as referenced in the Cboe rule (and as defined in Cboe Rule 
5.32(a)(1)(B)).
---------------------------------------------------------------------------

     The Initiating Order to the extent there are any remaining 
contracts.\116\
---------------------------------------------------------------------------

    \116\ See proposed Section 12(e)(1)(D), which is materially 
identical to Cboe Rule 5.73(e)(1)(D).
---------------------------------------------------------------------------

     Price Improvement with Single-Price Submission: If the 
FLEX PIM auction results in price improvement for the Agency Order and 
the Initiating Member selected a single-price submission, at each price 
better than the final auction price, the System executes the Agency 
Order in the following order:
     Priority Customer responses (in time priority); \117\
---------------------------------------------------------------------------

    \117\ See proposed Section 12(e)(2)(A), which is materially 
identical to Cboe Rule 5.73(e)(2)(A).
---------------------------------------------------------------------------

     Other FLEX PIM responses (in time priority) at prices 
better than the final auction price; and
     All other FLEX PIM responses at the final auction price, 
allocated on a Size Pro-Rata basis (as defined in Options 3, Section 
10(c)).\118\
---------------------------------------------------------------------------

    \118\ See proposed Section 12(e)(2)(B), which is based on Cboe 
Rule 5.73(e)(2)(B), except the Exchange will specify that other FLEX 
PIM responses at prices better than the final auction price will be 
allocated in time priority and all other FLEX PIM responses at the 
final auction price will be allocated on a Size Pro-Rata Basis. 
While the current rules are silent in this regard, this behavior 
follows current PIM behavior.
---------------------------------------------------------------------------

    For example, assume a FLEX PIM Agency Order is sent for 100 
contracts with a price of $1.00 and the Initiating Member selected a 
single-price submission. There are two PIM responses for 5 contracts 
each at $0.98, two PIM responses for 20 contracts each at $0.99, and 
two PIM responses for 40 contracts each at $1.00. The PIM responses at 
$0.98 and $0.99 will be executed in their entirety. The PIM responses 
at $1.00 (final auction price) will be executed on a Size Pro-Rata 
basis.
    At the final auction price, the System executes any remaining 
contracts from the Agency Order at that price in the order set forth in 
proposed subparagraph (e)(1), as described above.\119\
---------------------------------------------------------------------------

    \119\ See proposed Section 12(e)(2), which is materially 
identical to Cboe Rule 5.73(e)(2).
---------------------------------------------------------------------------

     Price Improvement with Auto-Match: If the FLEX PIM auction 
results in price improvement for the Agency Order and the Initiating 
Member selected auto-match, at each price better than the final auction 
price up to the designated limit price, the System executes the Agency 
Order against the Initiating Order for the number of contracts equal to 
the aggregate size of all FLEX PIM responses and then executes the 
Agency Order against those responses in the order set forth in proposed 
subparagraph (e)(2) described above. At the final auction price, the 
System executes contracts at that price in the order set forth in 
proposed subparagraph (e)(1) described above.\120\
---------------------------------------------------------------------------

    \120\ See proposed Section 12(e)(3), which is materially 
identical to Cboe Rule 5.73(e)(3).
---------------------------------------------------------------------------

     Guaranteed Allocation: If the Initiating Member selects a 
single-price submission, it may elect for the Initiating Order to have 
less than their guaranteed allocation (50% if there is a response(s) 
from one other Member or 40% if there are responses from two or more 
Members) to trade against the

[[Page 22304]]

Agency Order. The Initiating Member may select a lesser percentage than 
their guaranteed allocation. If the Initiating Member elects 0%, then 
notwithstanding subparagraphs (e)(1) and (2), the System only executes 
the Initiating Order against any remaining Agency Order contracts at 
the stop price after the Agency Order is allocated to all FLEX PIM 
responses at all prices equal to or better than the stop price. 
Guaranteed allocation information is not available to other market 
participants and may not be modified after it is submitted.\121\
---------------------------------------------------------------------------

    \121\ See proposed Section 12(e)(4), which is based on Cboe Rule 
5.73(e)(4) except the Exchange will replace Cboe's last priority 
feature with a guaranteed allocation feature similar to current PIM 
functionality that allows Members to request a lower percentage than 
their guaranteed allocation. See Options 3, Section 13(d)(3). The 
Exchange notes that the proposed guaranteed allocation percentages 
of 50% (if there is a response(s) from one other Member) and 40% (if 
there are responses from two or more Members) for FLEX PIM will 
differ from the current guaranteed allocation percentage of 40% for 
standard PIM. As such, the Exchange is aligning to Cboe's allocation 
percentages. The Exchange also notes that its affiliate, Nasdaq BX, 
Inc. (``BX''), has consistent guaranteed allocation percentages for 
its price improvement auction, BX PRISM. See BX Options 3, Section 
13(ii)(A)(1).
---------------------------------------------------------------------------

    Pursuant to proposed Section 12(e)(5), the System cancels any 
unexecuted FLEX PIM responses (or unexecuted portions) at the 
conclusion of the FLEX PIM auction.\122\
---------------------------------------------------------------------------

    \122\ See Cboe Rule 5.73(e)(5) for substantially similar 
provisions.
---------------------------------------------------------------------------

    Lastly, the Exchange proposes a number of policies applicable to 
FLEX PIM as Supplementary Materials to Options 3A, Section 12. 
Specifically, proposed Supplementary Material .01 will provide that a 
Member may only use a FLEX PIM auction where there is a genuine 
intention to execute a bona fide transaction.\123\ Proposed 
Supplementary Material .02 will provide that it will be deemed conduct 
inconsistent with just and equitable principles of trade and a 
violation of Options 9, Section 1 \124\ to engage in a pattern of 
conduct where the Initiating Member breaks up an Agency Order into 
separate orders for the purpose of gaining a higher allocation 
percentage than the Initiating Member would have otherwise received in 
accordance with the allocation procedures contained in proposed 
paragraph (e) above.\125\ Lastly, proposed Supplementary Material .03 
will provide that if an allocation would result in less than one 
contract, then one contract will be allocated. This aligns to how the 
Exchange currently allocates contracts in PIM.\126\
---------------------------------------------------------------------------

    \123\ See Cboe Rule 5.73, Interpretations and Policies .01 for 
materially identical provisions.
    \124\ Options 9, Section 1 provides that no Member shall engage 
in acts or practices inconsistent with just and equitable principles 
of trade. Persons associated with Members shall have the same duties 
and obligations as Members under the Rules of Options 9.
    \125\ See Cboe Rule 5.73, Interpretations and Policies .02 for 
materially identical provisions.
    \126\ See Supplementary Material .10 to Options 3, Section 13.
---------------------------------------------------------------------------

N. FLEX SOM (Section 13)
    The Exchange proposes to establish SOM auction functionality for 
FLEX Options in Options 3A, Section 13. The proposed FLEX SOM auction 
will be substantially similar to Cboe's FLEX SAM in Cboe Rule 5.74, 
except for certain intended differences to align with the Exchange's 
current System functionality for non-FLEX Options, as further described 
below. Pursuant to proposed Section 13, a Member (the ``Initiating 
Member'') may electronically submit for execution an order (which may 
be a simple or complex order) it represents as agent (``Agency Order'') 
against a solicited order (``Solicited Order'') if it submits the 
Agency Order for electronic execution into a FLEX SOM auction pursuant 
to this Rule.\127\
---------------------------------------------------------------------------

    \127\ See Cboe Rule 5.74 for similar provisions. The Exchange 
will not add Cboe's language that the Solicited Order cannot have a 
Capacity F for the same executing firm ID (``EFID'') as the Agency 
Order because it will not System enforce the rejection of Firm 
capacity for the same badge/mnemonic as the Agency Order. Instead, 
it will to enforce the requirement that the contra-side order be a 
solicitation rather than a facilitation through surveillance, as it 
does today for non-FLEX SOM. The applicable rule for the foregoing 
requirement will be set forth in Supplementary Material .02 to 
Options 3A, Section 13.
---------------------------------------------------------------------------

    Proposed Section 13(a)(1)-(6) will set forth the FLEX SOM auction 
eligibility requirements, and will be substantially similar to Cboe 
Rule 5.74(a)(1)-(6) except as noted below. Specifically, the Initiating 
Member may initiate a FLEX SOM auction if all of the following 
conditions are met:
     Class. An Agency Order must in a FLEX Option class the 
Exchange designates as eligible for FLEX SOM auctions.
     FLEX Option Series. The Agency Order and Solicited Order 
must each be a FLEX Order that complies with proposed Section 11(a) in 
a permissible FLEX Option series that complies with proposed Section 
3(b).
     Marking. The Initiating Member must mark an Agency Order 
for FLEX SOM auction processing.
     Size. The Agency Order must be for at least the minimum 
size designated by the Exchange (which may not be less than 500 
standard option contracts). The Solicited Order must be for the same 
size as the Agency Order. The System handles each of the Agency Order 
and the Solicited Order as all-or-none.\128\
---------------------------------------------------------------------------

    \128\ See Cboe Rule 5.74(a)(4) for similar provisions except 
unlike Cboe, the Exchange will not allow the Solicited Order to be 
comprised of multiple solicited orders in FLEX SOM to be consistent 
with current non-FLEX SOM functionality in Options 3, Section 11(d). 
In addition, the Exchange will not incorporate Cboe's provisions 
relating to mini options or Micro FLEX Index Options into proposed 
Section 13(a)(4) as the Exchange does not list these products today.
---------------------------------------------------------------------------

     Minimum Increment. The price of the Agency Order and 
Solicited Order for simple FLEX Orders must be in an increment the 
Exchange determines on a class basis (which may not be smaller than the 
amounts set forth in Section 5 above). If the Agency Order and 
Solicited Order are complex orders, the price must be a net price for 
the complex strategy.\129\ While the Exchange will align to Cboe's 
minimum increment requirements (i.e., $0.01) for the individual options 
legs of a complex FLEX Order entered into a FLEX SOM, the Exchange also 
proposes to align the minimum increment requirements for stock-tied 
FLEX complex strategies with the existing requirements for stock-tied 
non-FLEX complex strategies as set forth in Options 3, Section 
14(c)(1). As such, proposed Options 3A, Section 12(a)(5) will further 
provide that the prices of Complex Options Strategies (as defined in 
Options 3, Section 14) may be expressed in one cent ($0.01) increments, 
and the options leg of Complex Options Strategies may be executed in 
one cent ($0.01) increments, regardless of the minimum increments 
otherwise applicable to the individual options legs of the order. 
Prices of Stock-Option Strategies or Stock-Complex Strategies (each as 
defined in Options 3, Section 14) may be expressed in any decimal price 
determined by the Exchange,\130\ and the stock leg of a Stock-Option 
Strategy or Stock-Complex Strategy may be executed in any decimal price 
permitted in the equity market. The options leg of a Stock-Option 
Strategy or Stock-Complex Strategy may be executed in one cent ($0.01) 
increments, regardless of the minimum increments otherwise applicable 
to the individual options legs of the order. Similar to stock-tied 
complex orders today, the Exchange believes that smaller minimum

[[Page 22305]]

increments are appropriate for complex FLEX Orders that contain a stock 
component as the stock component can trade at finer decimal increments 
permitted by the equity market.
---------------------------------------------------------------------------

    \129\ The Exchange notes that unlike Cboe, it will not allow 
prices to be entered as a percentage value, and therefore will not 
incorporate the applicable language from Cboe Rule 5.74(a)(5) into 
proposed Section 13(a)(5). As discussed above, the Exchange will 
also incorporate existing minimum increment requirements for non-
FLEX complex orders into proposed Section 13(a)(5) to align the 
proposed FLEX functionality with non-FLEX functionality.
    \130\ The minimum increment for Stock-Option Strategies and 
Stock-Complex Strategies can currently be expressed to four decimal 
places.
---------------------------------------------------------------------------

     An Initiating Member may only submit an Agency Order to a 
FLEX SOM auction after trading in FLEX Options is open pursuant to 
proposed Section 8.
    The System will reject or cancel both an Agency Order and Solicited 
Order submitted to a FLEX SOM auction that do not meet the conditions 
in proposed paragraph (a) as described above.
    Pursuant to proposed Section 13(b), the Solicited Order must stop 
the entire Agency Order at a specified price. If the Agency Order and 
Solicited Order are complex orders, the price must be a net price for 
the complex strategy. The Initiating Member must specify a single price 
at which it seeks to execute the Agency Order against the Solicited 
Order. Otherwise, the System will reject or cancel both an Agency Order 
and Solicited Order submitted to a FLEX SOM auction that do not meet 
this condition.\131\
---------------------------------------------------------------------------

    \131\ See Cboe Rule 5.74(b) for similar provisions, except the 
Exchange will not allow prices to be entered as a percentage value, 
and therefore will not incorporate the applicable language from 
Cboe's rule into proposed Section 13(b).
---------------------------------------------------------------------------

    Proposed Section 13(c) will govern the FLEX SOM auction process. 
Specifically, upon receipt of an Agency Order that meets the conditions 
in paragraphs (a) and (b) as described above, the FLEX SOM auction 
process commences. Proposed subparagraphs (c)(1)(A) and (B) will 
describe concurrent FLEX SOM auctions for simple Agency Orders and 
complex Agency Orders, respectively, and will be materially identical 
to Cboe Rule 5.74(c)(1)(A) and (B).
    One or more FLEX SOM auctions in the same FLEX Option series or 
same complex strategy (as applicable) may occur at the same time.\132\ 
To the extent there is more than one FLEX SOM auction in a FLEX Option 
series or complex strategy (as applicable) underway at the same time, 
the FLEX SOM auctions will conclude sequentially based on the times at 
which the FLEX SOM auction periods end. At the time each FLEX SOM 
auction concludes, the System allocates the Agency Order pursuant to 
proposed paragraph (e) as described below, and takes into account all 
FLEX SOM responses received during the FLEX SOM auction period. As 
noted above, the proposed concurrent FLEX SOM auction feature is 
consistent with Cboe's concurrent FLEX SAM auctions feature in Cboe 
Rule 5.74(c)(1), and is also consistent with the concurrent auction 
feature proposed above for FLEX Auctions and FLEX PIM. For the same 
reasons stated above for FLEX Auctions and FLEX PIM, the Exchange 
believes that providing this concurrent auction functionality for FLEX 
SOM may provide additional opportunities for execution of FLEX Orders 
by encouraging Members to use FLEX SOM.
---------------------------------------------------------------------------

    \132\ Further, for complex Agency Orders, SOM auctions in 
different complex strategies may be ongoing at any given time, even 
if the complex strategies have overlapping components. A FLEX SOM 
auction in a complex strategy may be ongoing at the same time as a 
FLEX SOM auction in any component of the complex strategy. See 
proposed subparagraph (c)(1)(B)(i) of Options 3A, Section 13.
---------------------------------------------------------------------------

    Pursuant to proposed Section 13(c)(2), the System initiates the 
FLEX SOM auction process by sending a FLEX SOM auction notification 
message detailing the side, size, price, capacity, auction ID, the 
length of the FLEX SOM auction period, and FLEX Option series or 
complex strategy, as applicable, of the Agency Order to all Members 
that elect to receive FLEX SOM auction notification messages. FLEX SOM 
auction notification messages will not be disseminated to OPRA. These 
provisions are materially identical to Cboe Rule 5.74(c)(2).
    Proposed Section 13(c)(3) will describe the ``FLEX SOM Auction 
period,'' and is based on Cboe Rule 5.74(c)(3). The FLEX SOM Auction 
period will be defined as a period of time that must be designated by 
the Initiating Member, which may be no less than three seconds and no 
more than five minutes. Similar to the exposure interval for electronic 
FLEX Auctions in Section 11(b) and the FLEX PIM Auction period in 
Section 12(c)(3) as discussed above, the Initiating Member will be 
required to identify a length of time within the specified parameters 
for FLEX SOM as there will be no default for the FLEX SOM Auction 
period. Otherwise, their FLEX Order will be rejected by the System. 
Further, if the designated length of the FLEX SOM Auction period 
exceeds the market close, then the auction will end at the market close 
with an execution, if an execution is permitted by this Section 13. 
Cboe's rule does not specify whether an execution (if permitted) would 
occur if the designated length exceeds the market close. However, the 
Exchange's non-FLEX auctions currently allow executions (as permitted 
by their respective rules) to occur in such scenarios, so the Exchange 
proposes to be consistent with current System functionality in this 
regard.\133\ In doing so, the Exchange's proposal will promote 
executions in FLEX SOM while also preventing executions after the 
market close.
---------------------------------------------------------------------------

    \133\ While this behavior is not explicitly stated in the 
current Rules, the Exchange's proposal will be consistent with 
current non-FLEX auction behavior, including current PIM and SOM 
behavior.
---------------------------------------------------------------------------

    Proposed Section 13(c)(4) will provide that an Initiating Member 
may not modify an Agency Order or Solicited Order after submission to a 
FLEX SOM auction. This will be similar to Cboe Rule 5.74(c)(4) except 
unlike Cboe, the Exchange will allow Initiating Members to cancel their 
Agency Orders and Solicited Orders upon submission into a FLEX SOM, 
which will align with current SOM functionality.\134\
---------------------------------------------------------------------------

    \134\ This feature is not explicitly stated in the current SOM 
rules in Options 3, Section 11(d), but it is consistent with current 
SOM functionality.
---------------------------------------------------------------------------

    Proposed Section 13(c)(5) will govern the requirements for FLEX SOM 
responses. Specifically:
     Any Member other than the Initiating Member (the response 
cannot have the same badge/mnemonic as the Agency Order) may submit 
responses to a FLEX SOM auction that are properly marked specifying 
size, side, price, and the auction ID for the FLEX SOM auction to which 
the Member is submitting the response. A FLEX SOM response may only 
participate in the FLEX SOM auction with the auction ID specified in 
the response.\135\
---------------------------------------------------------------------------

    \135\ See proposed Options 3A, Section 13(c)(5), which is based 
on Cboe Rule 5.74(c)(5).
---------------------------------------------------------------------------

     The minimum price increment for FLEX SOM responses is the 
same as the one the Exchange determines for a class pursuant to 
proposed Section 12(a)(5) above. A response to a FLEX SOM auction of a 
complex Agency Order must have a net price. The System will reject a 
FLEX SOM response that is not in the applicable minimum increment.\136\
---------------------------------------------------------------------------

    \136\ See proposed Options 3A, Section 13(c)(5)(A), which is 
based on Cboe Rule 5.74(c)(5)(A) except the Exchange will not allow 
prices to be expressed as a percentage value.
---------------------------------------------------------------------------

     A Member using the same badge/mnemonic may only submit a 
single FLEX SOM response per auction ID for a given auction. If an 
additional SOM response is submitted for the same auction ID from the 
same badge/mnemonic, then that FLEX SOM response will automatically 
replace the previous FLEX SOM response.\137\
---------------------------------------------------------------------------

    \137\ See proposed Options 3A, Section 13(c)(5)(B), which will 
be different from Cboe Rule 5.74(c)(5)(B) because the Exchange will 
not allow Members to submit multiple FLEX SOM responses using the 
same badge/mnemonic, and will not aggregate all of the Member's FLEX 
SOM responses. While the rules are currently silent in this regard, 
the proposed language will align to current non-FLEX auction 
functionality, including SOM auctions in Options 3, Section 11(d).
---------------------------------------------------------------------------

     The System will cap the size of a FLEX SOM response at the 
size of the

[[Page 22306]]

Agency Order (i.e., the System will ignore size in excess of the size 
of the Agency Order when processing the FLEX SOM auction).\138\
---------------------------------------------------------------------------

    \138\ See proposed Options 3A, Section 13(c)(5)(C), which is 
based on Cboe Rule 5.74(c)(5)(C) except the Exchange will not allow 
Members to submit multiple FLEX SOM responses using the same badge/
mnemonic, and will not aggregate all of the Member's FLEX SOM 
responses. As noted above, this will align to current non-FLEX 
auction functionality, including SOM auctions in Options 3, Section 
11(d).
---------------------------------------------------------------------------

     FLEX SOM responses must be on the opposite side of the 
market as the Agency Order. The System rejects a FLEX SOM response on 
the same side of the market as the Agency Order.\139\
---------------------------------------------------------------------------

    \139\ See proposed Options 3A, Section 13(c)(5)(D), which is 
materially identical to Cboe Rule 5.74(c)(5)(D).
---------------------------------------------------------------------------

     FLEX SOM responses will not be visible to FLEX SOM auction 
participants or disseminated to OPRA.\140\
---------------------------------------------------------------------------

    \140\ See proposed Options 3A, Section 13(c)(5)(E), which is 
materially identical to Cboe Rule 5.74(c)(5)(E).
---------------------------------------------------------------------------

     A Member may modify or cancel its FLEX SOM responses 
during a FLEX SOM auction.\141\
---------------------------------------------------------------------------

    \141\ See proposed Options 3A, Section 13(c)(5)(F), which is 
materially identical to Cboe Rule 5.74(c)(5)(F).
---------------------------------------------------------------------------

    Pursuant to proposed Section 13(d), a FLEX SOM auction concludes at 
the earliest to occur of the following times: (1) the end of the FLEX 
SOM auction period; and (2) any time the Exchange halts trading in the 
affected series, provided, however, that in such instance the FLEX SOM 
auction concludes without execution.\142\
---------------------------------------------------------------------------

    \142\ See Cboe Rule 5.74(d) for materially identical provisions.
---------------------------------------------------------------------------

    Proposed Section 13(e) will govern how executions will occur in 
FLEX SOM. In particular, at the end of the FLEX SOM auction, the System 
will execute the Agency Order against the Solicited Order or FLEX SOM 
responses at the best price(s) as follows. For purposes of ranking the 
Solicited Order and FLEX SOM responses when determining how to allocate 
the Agency Order against the Solicited Order and those responses, the 
term ``price'' refers to the dollar and decimal amount of the order or 
response bid or offer.\143\ Proposed subparagraphs (e)(1)-(3) details 
the FLEX SOM allocation methodology for the following scenarios:
---------------------------------------------------------------------------

    \143\ See Cboe Rule 5.74(e) for similar provisions except the 
Exchange will not allow prices to be expressed as a percentage 
value.
---------------------------------------------------------------------------

     Execution Against Solicited Order: The System executes the 
Agency Order against the Solicited Order at the stop price if there are 
no Priority Customer FLEX SOM responses and the aggregate size of FLEX 
SOM responses at an improved price(s) is insufficient to satisfy the 
Agency Order.\144\
---------------------------------------------------------------------------

    \144\ See proposed Section 13(e)(1), which is materially 
identical to Cboe Rule 5.74(e)(1).
---------------------------------------------------------------------------

     Execution Against FLEX SOM Responses: The System executes 
the Agency Order against FLEX SOM responses if (1) there is a Priority 
Customer FLEX SOM response and the aggregate size of that response and 
all other FLEX SOM responses is sufficient to satisfy the Agency Order 
or (2) the aggregate size of FLEX SOM responses at an improved price(s) 
is sufficient to satisfy the Agency Order. The Agency Order executes 
against FLEX SOM responses at each price level. At the price at which 
the balance of the Agency Order can be fully executed, in the following 
order:
     Priority Customer FLEX SOM responses (in time priority); 
\145\ and
---------------------------------------------------------------------------

    \145\ See proposed Section 13(e)(2)(A), which is materially 
identical to Cboe Rule 5.74(e)(2)(A).
---------------------------------------------------------------------------

     All other FLEX SOM responses, allocated on a Size Pro-Rata 
basis (as defined in Options 3, Section 10(c)).\146\
---------------------------------------------------------------------------

    \146\ See proposed Section 13(e)(2)(B), which is materially 
identical to Cboe Rule 5.74(e)(2)(B). The Exchange notes that Size 
Pro-Rata (as defined in Options 3, Section 10(c)) is similar to pro-
rata as referenced in the Cboe rule (and as defined in Cboe Rule 
5.32(a)(1)(B)).
---------------------------------------------------------------------------

     No Execution: The System will cancel the Agency Order and 
Solicited Order with no execution if there is a Priority Customer FLEX 
SOM response and the aggregate size of that response and other FLEX SOM 
responses is insufficient to satisfy the Agency Order.\147\
---------------------------------------------------------------------------

    \147\ See proposed Section 13(e)(3), which is materially 
identical to Cboe Rule 5.74(e)(3).
---------------------------------------------------------------------------

    Pursuant to proposed Section 12(e)(4), the System cancels any 
unexecuted FLEX SOM responses (or unexecuted portions) at the 
conclusion of a FLEX SOM auction.\148\
---------------------------------------------------------------------------

    \148\ See Cboe Rule 5.74(e)(4) for substantially similar 
provisions.
---------------------------------------------------------------------------

    Lastly, the Exchange proposes a number of policies applicable to 
FLEX SOM as Supplementary Materials to Options 3A, Section 13. 
Specifically, proposed Supplementary Material .01 will provide that 
prior to entering Agency Orders into a FLEX SOM auction on behalf of 
customers, Initiating Members must deliver to the customer a written 
notification informing the customer that its order may be executed 
using the FLEX SOM Auction. The written notification must disclose the 
terms and conditions contained in this Rule and be in a form approved 
by the Exchange.\149\ Proposed Supplementary Material .02 will provide 
that under this Rule, Initiating Members may enter contra-side orders 
that are solicited. FLEX SOM provides a facility for Members that 
locate liquidity for their customer orders. Members may not use the 
FLEX SOM auction to circumvent Options 3, Section 22(b) limiting 
principal transactions. This may include, but is not limited to, 
Members entering contra-side orders that are solicited from (1) 
affiliated broker-dealers, or (2) broker-dealers with which the Member 
has an arrangement that allows the Member to realize similar economic 
benefits from the solicited transaction as it would achieve by 
executing the customer order in whole or in part as principal. 
Additionally, any solicited contra-side orders entered by Members to 
trade against Agency Orders may not be for the account of an Exchange 
Market Maker that is assigned to the options class.\150\ Lastly, 
proposed Supplementary Material .03 will provide that if an allocation 
would result in less than one contract, then one contract will be 
allocated. This aligns to how the Exchange currently allocates 
contracts in SOM.\151\
---------------------------------------------------------------------------

    \149\ See Cboe Rule 5.74, Interpretations and Policies .01 for 
materially identical provisions.
    \150\ See Cboe Rule 5.74, Interpretations and Policies .02 for 
similar provisions. The Exchange is also adding a prohibition 
against solicited contra-side orders being for the account of an 
Exchange Market Maker assigned to the options class to align with 
the current prohibition in Supplementary Material .03 to Options 3, 
Section 11.
    \151\ See Supplementary Material .09 to Options 3, Section 11.
---------------------------------------------------------------------------

O. Risk Protections (Section 14)
    The Exchange proposes in Options 3A, Section 14 to specify which of 
the Exchange's risk protections apply to FLEX trading. Proposed Section 
14(a) will provide that the following simple order risk protections (as 
described in Options 3, Section 15) are available to FLEX Options: 
Market Wide Risk Protection \152\ and Size Limitation.\153\ Proposed 
Section 14(b) will provide that the following complex order risk 
protections (as described in Options 3, Section 16) are available to 
FLEX Options: Strategy Protections (only to FLEX Auctions and FLEX 
responses in proposed Options 3A, Section 11(b)) \154\

[[Page 22307]]

and Size Limitation.\155\ Today, Strategy Protections do not apply to 
orders and responses submitted into non-FLEX PIM and non-FLEX SOM. The 
Exchange will align this application to FLEX such that Strategy 
Protections would only apply to FLEX Auctions and FLEX responses in 
proposed Section 11(b) as described above, and not to FLEX Orders and 
responses submitted into FLEX PIM and FLEX SOM. Proposed Section 14(c) 
will provide that the optional risk protections in Options 3, Section 
28 are available to FLEX Options.\156\
---------------------------------------------------------------------------

    \152\ Market Wide Risk Protection are mandatory activity-based 
protections that establish limits for order entry and order 
execution rate. Upon triggering the specified limits, the System 
will either delete all open orders and prevent entry of new orders 
for the Member, or prevent entry of new orders for the Member. See 
Options 3, Section 15(a)(1)(C).
    \153\ Size Limitation for simple orders is a limit on the number 
of contracts an incoming order may specify. Orders that exceed the 
maximum number of contracts are rejected. The maximum number of 
contracts, which shall not be less than 10,000, is established by 
the Exchange from time-to-time. See Options 3, Section 15(a)(2)(B).
    \154\ The Strategy Protections in Options 3, Section 16(b) as 
the Vertical Spread Protection, Calendar Spread Protection, 
Butterfly Spread Protection, and Box Spread Protection, and are 
aimed at preventing the potential execution of certain complex 
strategies outside of specified price parameters.
    \155\ Size Limitation for complex orders is a limit on the 
number of contracts (and shares in the case of a Stock-Option 
Strategy or Stock-Complex Strategy) any single leg of an incoming 
Complex Order may specify. Orders that exceed the maximum number of 
contracts (or shares) are rejected. The maximum number of contracts 
(or shares), which shall not be less than 10,000 (or 100,000 
shares), is established by the Exchange from time-to-time. See 
Options 3, Section 16 (c)(2).
    \156\ The Exchange will introduce the optional risk protections 
in Options 3, Section 28 as part of the technology migration to 
enhanced Nasdaq functionality discussed above. In particular, the 
following are optional risk protections in Options 3, Section 28: 
notional dollar value per order, daily aggregate notional dollar 
value, quantity per order, and daily aggregate quantity. See 
Securities Exchange Act Releases No. 96818 (February 6, 2023), 88 FR 
8950 (February 10, 2023) (SR-ISE-2023-06).
---------------------------------------------------------------------------

P. Data Feeds (Section 15)
    The Exchange proposes to specify in Options 3A, Section 15 which 
data feeds it will disseminate auction notifications for simple and 
complex FLEX Orders. Proposed Section 15(a) will provide that auction 
notifications for simple FLEX Orders will be disseminated through the 
Order Feed, as described in Options 3, Section 23(a)(2).\157\ Proposed 
Section 15(b) will provide that auction notifications for complex FLEX 
Orders will be disseminated through the Spread Feed, as described in 
Options 3, Section 23(a)(5).\158\ The Exchange notes that this aligns 
to current functionality where simple auction notifications are 
disseminated over the Order Feed and complex auction notifications are 
disseminated over the Spread Feed.
---------------------------------------------------------------------------

    \157\ The Nasdaq ISE Order Feed (``Order Feed'') provides 
information on new orders resting on the book (e.g. price, quantity 
and market participant capacity). In addition, the feed also 
announces all auctions. The data provided for each option series 
includes the symbols (series and underlying security), put or call 
indicator, expiration date, the strike price of the series, and 
whether the option series is available for trading on ISE and 
identifies if the series is available for closing transactions only. 
The feed also provides order imbalances on opening/reopening.
    \158\ Nasdaq ISE Spread Feed (``Spread Feed'') is a feed that 
consists of: (1) options orders for all Complex Orders (i.e., 
spreads, buy-writes, delta neutral strategies, etc.); (2) data 
aggregated at the top five price levels (BBO) on both the bid and 
offer side of the market; (3) last trades information. The Spread 
Feed provides updates, including prices, side, size and capacity, 
for every Complex Order placed on the ISE Complex Order book. The 
Spread Feed shows: (1) aggregate bid/ask quote size; (2) aggregate 
bid/ask quote size for Professional Customer Orders; and (3) 
aggregate bid/ask quote size for Priority Customer Orders for ISE 
traded options. The feed also provides Complex Order auction 
notifications.
---------------------------------------------------------------------------

Q. FLEX Market Makers (Section 16)
    Proposed Section 16 will govern FLEX Market Makers on the Exchange. 
Pursuant to proposed Section 16(a), a FLEX Market Maker will 
automatically receive an appointment in the same FLEX option class(es) 
as its non-FLEX class appointments selected pursuant to Options 2, 
Section 3.\159\ Only the Primary Market Maker in the non-FLEX Option 
may be the assigned Primary Market Maker in that FLEX Option.\160\
---------------------------------------------------------------------------

    \159\ See Cboe Rule 3.58(c) for materially identical provisions.
    \160\ The Exchange notes that this requirement is based on Phlx 
Options 8, Section 34(d)(1), which currently states that only the 
Lead Market Maker in the non-FLEX option may be the assigned 
Specialist in that FLEX option. Primary Market Maker on ISE is 
analogous to a Lead Market Maker on Phlx.
---------------------------------------------------------------------------

    Proposed Section 16(b) will provide that each FLEX Market Maker 
must fulfill all the obligations of a Market Maker under Options 2 and 
must comply with the applicable provisions, except FLEX Market Makers 
do not need to provide continuous quotes in FLEX Options.\161\
---------------------------------------------------------------------------

    \161\ See Cboe Rule 5.57 for similar provisions. Unlike Cboe, 
the Exchange will not specify that a FLEX Market Maker may (but is 
not obligated to) respond to a FLEX auction in a class in which the 
FLEX Market Maker is appointed. FLEX Market Makers will be subject 
to Options 2 rules pertaining to Market Makers, except the Exchange 
will not impose continuing quoting obligations on FLEX Market Makers 
(similar to Cboe) given that such obligations are relevant for book 
trading. As discussed above, there will be no book trading for FLEX 
Options. Furthermore, the Exchange will not incorporate provisions 
related to FLEX Officials like Cboe as this is generally a floor 
trading concept and the Exchange does not have a trading floor.
---------------------------------------------------------------------------

R. Letters of Guarantee (Section 17)
    The Exchange proposes in Options 3A, Section 17(a) to provide that 
no FLEX Market Maker shall effect any transaction in FLEX Options 
unless one or more effective Letter(s) of Guarantee has been issued by 
a Clearing Member and filed with the Exchange accepting financial 
responsibility for all FLEX transactions made by the FLEX Market Maker 
pursuant to Options 6, Section 4.\162\
---------------------------------------------------------------------------

    \162\ Options 6, Section 4 provides that no Market Maker shall 
make any transactions on the Exchange unless a Letter of Guarantee 
has been issued for such Member by a Clearing Member and filed with 
the Exchange, and unless such Letter of Guarantee has not been 
revoked pursuant to paragraph (c) of this Rule. A Letter of 
Guarantee shall provide that the issuing Clearing Member accepts 
financial responsibilities for all Exchange Transactions made by the 
guaranteed Member.
---------------------------------------------------------------------------

S. Position Limits (Section 18)
    The Exchange proposes to detail the position limits for FLEX 
Options in Options 3A, Section 18. As discussed below, proposed Section 
18 will be based on the FLEX Options position limit rules on Cboe and 
Phlx.
    Proposed Section 18(a) will govern the position limits for FLEX 
Index Options. Specifically, proposed Section 18(a)(1) will provide 
that except as provided in proposed Section 18(a)(2)-(3) below, FLEX 
Index Options shall be subject to the same position limits governing 
index options as provided for in Options 4A, Sections 6 and 7.\163\ 
Proposed Section 18(a)(2) will provide that except for the broad-based 
index options listed in Options 4A, Section 6(a),\164\ which will have 
no position limits for FLEX Index Options, broad-based FLEX Index 
Options will be subject to a separate position limit of 200,000 
contracts on the same side of the market.\165\ Proposed Section 
18(a)(3) will provide that industry-based FLEX Index Options shall be 
subject to separate position limits of 36,000, 48,000, or 60,000 
contracts, depending on the position limit tier determined pursuant to 
Options 4A, Section 7(a)(1).\166\
---------------------------------------------------------------------------

    \163\ See Phlx Options 8, Section 34(e)(1) for materially 
identical provisions. Options 4A, Sections 6 and 7 presently set 
forth the position limits for broad-based and industry index 
options, respectively.
    \164\ As such the following broad-based index options listed in 
Options 4A, Section 6(a) will have no position limits for FLEX Index 
Options: options on the Nasdaq 100 Index, Mini Nasdaq 100 Index, 
Nations VolDex Index, Nasdaq 100 Reduced Value Index, and Nasdaq 
Micro Index Options.
    \165\ This separate same side position limit for broad-based 
FLEX Index Options (except for the ones noted above) is based on 
Phlx Options 8, Section 34(e)(1). The Exchange notes that market 
index options, as referenced in the Phlx rule, is the equivalent of 
broad-based index options on the Exchange.
    \166\ See Phlx Options 8, Section 34(e)(1) for materially 
identical provisions.
---------------------------------------------------------------------------

    Proposed Section 18(b) will govern the position limits for FLEX 
Equity Options. Pursuant to proposed Section 18(b)(1)(A), there will 
generally be no position limits for FLEX Equity Options.\167\ Pursuant 
to proposed Section 18(b)(2), each Member (other than a Market Maker) 
that maintains a

[[Page 22308]]

position on the same side of the market in excess of the standard limit 
under Options 9, Section 13 for non-FLEX Equity Options of the same 
class on behalf of its own account or for the account of a customer 
shall report information on the FLEX Equity option position, positions 
in any related instrument, the purpose or strategy for the position, 
and the collateral used by the account. This report shall be in the 
form and manner prescribed by the Exchange.\168\ Pursuant to proposed 
Section 18(b)(3), whenever the Exchange determines that a higher margin 
requirement is necessary in light of the risks associated with a FLEX 
Equity option position in excess of the standard limit for non-FLEX 
Equity options of the same class, the Exchange may consider imposing 
additional margin upon the account maintaining such under-hedged 
position, pursuant to its authority under Options 6C, Section 5.\169\ 
Additionally, it should be noted that the clearing firm carrying the 
account will be subject to capital charges under Rule 15c3-1 under the 
Exchange Act to the extent of any margin deficiency resulting from the 
higher margin requirement.\170\
---------------------------------------------------------------------------

    \167\ See Cboe Rule 8.35(c)(1)(A) for materially identical 
provisions. Like Cboe, the Exchange's rule will have exceptions for 
the aggregation of FLEX positions (proposed Section 18(c)) and for 
position limits for cash-settled FLEX Equity Options where the 
underlying security is an ETF (proposed Section 18(b)(1)(B), which 
will be discussed later in this filing).
    \168\ See Cboe Rule 8.35(c)(2) for materially identical 
provisions.
    \169\ Options 6C, Section 5 provides that the amount of margin 
prescribed by these Rules is the minimum which must be required 
initially and subsequently maintained with respect to each account 
affected thereby; but nothing in these Rules shall be construed to 
prevent a Member from requiring margin in an amount greater than 
that specified. Further, the Exchange may at any time impose higher 
margin requirements with respect to such positions when it deems 
such higher margin requirements to be advisable.
    \170\ See Cboe Rule 8.35(c)(3) for materially identical 
provisions.
---------------------------------------------------------------------------

    Proposed Section 18(c) will govern the aggregation of FLEX 
positions. Specifically, for purposes of the position limits and 
reporting requirements set forth in this Section 18, FLEX Option 
positions shall not be aggregated with positions in non-FLEX Options 
other than as provided in this Section 18(c) and in 
Section(b)(1)(B),\171\ and positions in FLEX Index Options on a given 
index shall not be aggregated with options on any stocks included in 
the index or with FLEX Index Option positions on another index.\172\ 
Pursuant to proposed Section 18(c)(1), commencing at the close of 
trading two business days prior to the last trading day of the calendar 
quarter, positions in P.M.-settled FLEX Index Options (i.e., FLEX Index 
Options having an exercise settlement value determined by the level of 
the index at the close of trading on the last trading day before 
expiration) shall be aggregated with positions in Quarterly Options 
Series on the same index with the same expiration and shall be subject 
to the position limits set forth in Options 4A, Section 6 or Section 7, 
as applicable.\173\ Pursuant to proposed Section 18(c)(2), commencing 
at the close of trading two business days prior to the last trading day 
of the week, positions in FLEX Index Options that are cash settled 
shall be aggregated with positions in Short Term Option Series on the 
same underlying (e.g., same underlying index as a FLEX Index Option) 
with the same means for determining exercise settlement value (e.g., 
opening or closing prices of the underlying index) and same expiration, 
and shall be subject to the position limits set forth in Options 4A, 
Section 6 or Section 7, as applicable.\174\ Pursuant to proposed 
Section 18(c)(3), as long as the options positions remain open, 
positions in FLEX Options that expire on a third Friday-of-the-month 
expiration day shall be aggregated with positions in non-FLEX Options 
on the same underlying, and shall be subject to the position limits set 
forth in Options 4A, Section 6, Options 4A, Section 7, or Options 9, 
Section 13, as applicable, and the exercise limits set forth in Options 
9, Section 15, as applicable.\175\
---------------------------------------------------------------------------

    \171\ Proposed Section 18(b)(1)(B) will set forth the position 
limits for cash-settled FLEX ETF options and will be discussed later 
in this filing.
    \172\ See Cboe Rule 8.35(d) for materially identical provisions.
    \173\ See Cboe Rule 8.35(d)(1) for materially identical 
provisions.
    \174\ This is based on Cboe Rule 8.35(d)(2), except the Exchange 
does not currently list Credit Default Options and will therefore 
not incorporate the applicable portion into its proposed rule.
    \175\ See Cboe Rule 8.35(d)(3) for materially identical 
provisions.
---------------------------------------------------------------------------

T. Exercise Limits (Section 19)
    The Exchange proposes to detail the exercise limits for FLEX 
Options in Options 3A, Section 19. As discussed below, proposed Section 
19 will be based on the FLEX Options exercise limit rules on Cboe and 
Phlx.
    Proposed Section 19(a) will provide that exercise limits for FLEX 
Options shall be equivalent to the FLEX position limits prescribed in 
proposed Section 18.\176\ There shall be no exercise limits for broad-
based FLEX Index Options (including reduced value option contracts) on 
broad-based index options listed in Options 4A, Section 6(a).\177\
---------------------------------------------------------------------------

    \176\ Proposed Section 19(a) is based on Cboe Rule 8.42(g) 
except the Exchange will not incorporate references to Cboe-specific 
products like Micro FLEX Index Options, FLEX Individual Stock or ETF 
Based Volatility Index Options. Similarly, the Exchange will replace 
the references to Cboe-specific broad-based index options like SPX, 
VIX, etc. with the broad-based index options in Options 4A, Section 
6(a).
    \177\ As such the following broad-based index options listed in 
Options 4A, Section 6(a) will have no exercise limits for FLEX Index 
Options: options on the Nasdaq 100 Index, Mini Nasdaq 100 Index, 
Nations VolDex Index, Nasdaq 100 Reduced Value Index, and Nasdaq 
Micro Index Options.
---------------------------------------------------------------------------

    Proposed Section 19(a)(1) will require that the minimum value size 
for FLEX Equity Option exercises be 25 contracts or the remaining size 
of the position, whichever is less.\178\ Proposed Section 19(a)(2) will 
require that the minimum value size for FLEX Index Option exercises be 
$1 million Underlying Equivalent Value (as defined below) or the 
remaining Underlying Equivalent Value of the position, whichever is 
less.\179\ Proposed Section 19(a)(3) will stipulate that except as 
provided in proposed Section 18(b)(1)(B) and Section 18(c) above,\180\ 
FLEX Options shall not be taken into account when calculating exercise 
limits for non-FLEX Option contracts.\181\ Lastly, proposed Section 
19(a)(4) will set forth the definition of Underlying Equivalent Value 
as the aggregate value of a FLEX Index Option (index multiplier times 
the current index value) multiplied by the number of FLEX Index 
Options.\182\
---------------------------------------------------------------------------

    \178\ See Cboe Rule 8.42(g)(1) for materially identical 
provisions.
    \179\ See Cboe Rule 8.42(g)(2) for materially identical 
provisions.
    \180\ As described above, proposed Section 18(c) will govern the 
aggregation of FLEX positions generally, while proposed Section 
18(b)(1)(B) will govern the aggregation of cash-settled FLEX Equity 
Options specifically. Cash-settled FLEX Equity Options will be 
discussed later in this filing.
    \181\ See Cboe Rule 8.42(g)(3) for materially identical 
provisions.
    \182\ See Phlx Options 8, Section 34(b)(8)(D) for materially 
identical provisions.
---------------------------------------------------------------------------

U. Capacity and Surveillances
    The Exchange has analyzed its capacity and represents that it 
believes the Exchange and the Options Price Reporting Authority 
(``OPRA'') have the necessary systems capacity to handle the additional 
message traffic associated with the listing of new series that may 
result from the introduction of FLEX Options.\183\
---------------------------------------------------------------------------

    \183\ The Exchange will report FLEX Option trades and, if 
necessary, trade cancellations to OPRA.
---------------------------------------------------------------------------

    Additionally, the Exchange believes it has an adequate surveillance 
program in place and intends to apply the same program procedures to 
FLEX Options that is applied to the Exchange's other options products, 
as applicable. FLEX Option products and their respective symbols will 
be integrated into the Exchange's existing surveillance system 
architecture and will be subject to the relevant surveillance 
processes. The Exchange believes that any potential

[[Page 22309]]

risk of manipulative activity is mitigated by these existing 
surveillance technologies, procedures, and reporting requirements, 
which allow the Exchange to properly identify disruptive and/or 
manipulative trading activity.
V. Cash-Settled FLEX ETFs
    The Exchange proposes to include rule text in proposed Options 3A, 
Section 3(c) and Section 18, each as discussed above, to allow for cash 
settlement of certain FLEX Equity Options. Generally, as discussed 
above, FLEX Equity Options will be settled by physical delivery of the 
underlying security,\184\ while all FLEX Index Options will be settled 
by delivery in cash.\185\ The Exchange proposes to allow FLEX Equity 
Options where the underlying security is an ETF to be settled by 
delivery in cash if the underlying security meets prescribed criteria. 
The Exchange notes that cash-settled FLEX ETF Options will be subject 
to the same trading rules and procedures described above that will 
govern the trading of other FLEX Options on the Exchange, with the 
exception of the rules to accommodate the cash-settlement feature 
proposed as follows. Today, NYSE American Rule 903G \186\ and Cboe Rule 
4.21(b)(5)(A) \187\ allow for cash-settled FLEX ETF Options as well.
---------------------------------------------------------------------------

    \184\ See proposed Options 3A, Section 3(c)(5)(A)(i).
    \185\ See proposed Options 3A, Section 3(c)(5)(B). As discussed 
below, cash settlement is also permitted in the OTC market.
    \186\ See Securities Exchange Act Release No. 88131 (February 5, 
2020), 85 FR 7806 (February 11, 2020) (SR-NYSEAmer-2019-38) (Notice 
of Filing of Amendment No. 1 and Order Granting Accelerated Approval 
of a Proposed Rule Change, as Modified by Amendment No. 1, To Allow 
Certain Flexible Equity Options To Be Cash Settled).
    \187\ Cboe also recently filed to allow certain FLEX Options to 
be cash settled. See Securities Exchange Act Release No. 98044 
(August 2, 2023), 88 FR 53548 (August 8, 2023) (SR-Cboe-2023-036) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Allow Certain Flexible Exchange Equity Options To Be Cash 
Settled).
---------------------------------------------------------------------------

    To permit cash settlement of certain FLEX ETF Options, the Exchange 
proposes rule text in Section 3(c)(5)(A)(ii) to provide that the 
exercise settlement for a FLEX ETF Option may be by physical delivery 
of the underlying ETF or by delivery in cash if the underlying 
security, measured over the prior six-month period, has an average 
daily notional value of $500 million or more and a national average 
daily volume (``ADV'') of at least 4,680,000 shares.\188\
---------------------------------------------------------------------------

    \188\ See Cboe Rule 4.21(b)(5)(A)(ii) for materially identical 
provisions.
---------------------------------------------------------------------------

    The Exchange also proposes in Section 3(c) that a FLEX Equity 
Option overlying an ETF (cash- or physically-settled) may not be the 
same type (put or call) and may not have the same exercise style, 
expiration date, and exercise price as a non-FLEX Equity Option 
overlying the same ETF.\189\ In other words, regardless of whether a 
FLEX Equity Option overlying an ETF is cash or physically settled, at 
least one of the exercise style (i.e., American-style or European-
style), expiration date, and exercise price of that FLEX Option must 
differ from those terms of a non-FLEX Option overlying the same ETF in 
order to list such a FLEX Equity Option. For example, suppose a non-
FLEX SPY option (which is physically settled, p.m.-settled and 
American-style) with a specific September expiration and exercise price 
of 475 is listed for trading. A FLEX Trader could not submit an order 
to trade a FLEX SPY option (which is p.m.-settled) that is cash-settled 
(or physically settled) and American-style with the same September 
expiration and exercise price of 475.
---------------------------------------------------------------------------

    \189\ See introductory paragraph of Cboe Rule 4.21(b) for 
materially identical provisions. All non-FLEX Equity Options 
(including on ETFs) are physically settled. Note all FLEX and non-
FLEX Equity Options (including ETFs) are p.m.-settled.
---------------------------------------------------------------------------

    In addition, the Exchange proposes new subparagraph (a) to Section 
3(c)(5)(A)(ii), which would provide that the Exchange will determine 
bi-annually the underlying ETFs that satisfy the notional value and 
trading volume requirements in Section 3(c)(5)(A)(ii) by using trading 
statistics for the previous six-month period.\190\ The proposed rule 
would further provide that the Exchange will permit cash settlement as 
a contract term on no more than 50 underlying ETFs that meet the 
criteria in this subparagraph (ii) and that if more than 50 underlying 
ETFs satisfy the notional value and trading volume requirements, then 
the Exchange would select the top 50 ETFs that have the highest average 
daily volume.\191\
---------------------------------------------------------------------------

    \190\ See proposed Options 3A, Section 3(c)(5)(A)(ii)(a), which 
is based on Cboe Rule 4.21(b)(5)(A)(ii)(a). The Exchange plans to 
conduct the bi-annual review on January 1 and July 1 of each year. 
The results of the bi-annual review will be announced via an Options 
Trader Alert and any new securities that qualify would be permitted 
to have cash settlement as a contract term beginning on February 1 
and August 1 of each year. If the Exchange initially begins listing 
cash-settled FLEX Equity Options on a different date (e.g., 
September 1), it would initially list securities that qualified as 
of the last bi-annual review (e.g., the one conducted on July 1).
    \191\ See proposed Options 3A, Section 3(c)(5)(A)(ii)(a), which 
is based on Cboe Rule 4.21(b)(5)(A)(ii)(a).
---------------------------------------------------------------------------

    Proposed new subparagraph (b) to Section 3(c)(5)(A)(ii) would 
further provide that if the Exchange determines pursuant to the bi-
annual review that an underlying ETF ceases to satisfy the requirements 
under proposed Section 3(c)(5)(A)(ii), any new position overlying such 
ETF entered into will be required to have exercise settlement by 
physical delivery, and any open cash-settled FLEX ETF Option positions 
may be traded only to close the position.\192\
---------------------------------------------------------------------------

    \192\ See proposed Section 3(c)(5)(A)(ii)(b), which is based on 
Cboe Rule 4.21(b)(5)(A)(ii)(b). If a listing is closing only, 
pursuant to Options 4, Section 4(a), opening transactions by Market 
Makers executed to accommodate closing transactions of other market 
participants are permitted.
---------------------------------------------------------------------------

    The Exchange believes it is appropriate to introduce cash 
settlement as an alternative contract term to the select group of ETFs 
because they are among the most highly liquid and actively traded ETF 
securities. As described more fully below, the Exchange believes that 
the deep liquidity and robust trading activity in the ETFs identified 
by the Exchange as meeting the criteria mitigate against historic 
concerns regarding susceptibility to manipulation.
Characteristics of ETFs
    ETFs are funds that have their value derived from assets owned. The 
net asset value (``NAV'') of an ETF is a daily calculation that is 
based off the most recent closing prices of the assets in the fund and 
an actual accounting of the total cash in the fund at the time of 
calculation. The NAV of an ETF is calculated by taking the sum of the 
assets in the fund, including any securities and cash, subtracting out 
any liabilities, and dividing that by the number of shares outstanding.
    Additionally, each ETF is subject to a creation and redemption 
mechanism to ensure the price of the ETF does not fluctuate too far 
away from its NAV--which mechanisms reduce the potential for 
manipulative activity. Each business day, ETFs are required to make 
publicly available a portfolio composition file that describes the 
makeup of their creation and redemption ``baskets'' (i.e., a specific 
list of names and quantities of securities or other assets designed to 
track the performance of the portfolio as a whole). ETF shares are 
created when an Authorized Participant, typically a market maker or 
other large institutional investor, deposits the daily creation basket 
or cash with the ETF issuer. In return for the creation basket or cash 
(or both), the ETF issues to the Authorized Participant a ``creation 
unit'' that consists of a specified number of ETF shares. For instance, 
IWM is designed to track the performance of the Russell 2000 Index. An 
Authorized Participant will purchase all the Russell 2000

[[Page 22310]]

constituent securities in the exact same weight as the index 
prescribes, then deliver those shares to the ETF issuer. In exchange, 
the ETF issuer gives the Authorized Participant a block of equally 
valued ETF shares, on a one-for-one fair value basis. This process can 
also work in reverse. A redemption is achieved when the Authorized 
Participant accumulates a sufficient number of shares of the ETF to 
constitute a creation unit and then exchanges these ETF shares with the 
ETF issuer, thereby decreasing the supply of ETF shares in the market.
    The principal, and perhaps most important, feature of ETFs is their 
reliance on an ``arbitrage function'' performed by market participants 
that influences the supply and demand of ETF shares and, thus, trading 
prices relative to NAV. As noted above, new ETF shares can be created 
and existing shares redeemed based on investor demand; thus, ETF supply 
is open-ended. This arbitrage function helps to keep an ETF's price in 
line with the value of its underlying portfolio, i.e., it minimizes 
deviation from NAV. Generally, in the Exchange's view, the higher the 
liquidity and trading volume of an ETF, the more likely the price of 
the ETF will not deviate from the value of its underlying portfolio, 
making such ETFs less susceptible to price manipulation.
Trading Data for the ETFs Proposed for Cash Settlement
    The Exchange believes that average daily notional value is an 
appropriate proxy for selecting underlying securities that are not 
readily susceptible to manipulation for purposes of establishing a 
settlement price. Average daily notional value considers both the 
trading activity and the price of an underlying security. As a general 
matter, the more expensive an underlying security's price, the less 
cost-effective manipulation could become. Further, manipulation of the 
price of a security encounters greater difficulty the more volume that 
is traded. To calculate average daily notional value (provided in the 
table below), the Exchange summed the notional value of each trade for 
each symbol (i.e., the number of shares times the price for each 
execution in the security) and divided that total by the number of 
trading days in the six-month period (from June 1, 2023 through 
December 31, 2023) reviewed by the Exchange.
    Further, the Exchange proposes that qualifying ETFs also meet an 
ADV standard. The purpose for this second criteria is to prevent 
unusually expensive underlying securities from qualifying under the 
average daily notional value standard while not being one of the most 
actively traded securities. The Exchange believes an ADV requirement of 
4,680,000 shares a day is appropriate because it represents average 
trading in the underlying ETF of 200 shares per second. While no 
security is immune from all manipulation, the Exchange believes that 
the combination of average daily notional value and ADV as prerequisite 
requirements would limit cash settlement of FLEX ETF Options to those 
underlying ETFs that would be less susceptible to manipulation in order 
to establish a settlement price.
    The Exchange believes that the proposed objective criteria would 
ensure that only the most robustly traded and deeply liquid ETFs would 
qualify to have cash settlement as a contract term. As provided in the 
below table, as of December 31, 2023, the Exchange would be able to 
provide cash settlement as a contract term for FLEX ETF Options on 39 
underlying ETFs, as only this group of securities would currently meet 
the requirement of $500 million or more average daily notional value 
and a minimum ADV of 4,680,000 shares. The table below provides the 
list of the 39 ETFs that, as of December 31, 2023, would be eligible to 
have cash settlement as a contract term.

----------------------------------------------------------------------------------------------------------------
                                                                              Average daily      Average daily
                                                                              notional value       volume (in
                 Symbol                             Security name           (in dollars) (6/1/  shares) (6/1/23-
                                                                               23-12/31/23)        12/31/23)
----------------------------------------------------------------------------------------------------------------
AGG.....................................  iShares Core U.S. Aggregate Bond        819,003,505          8,539,037
                                           ETF.
ARKK....................................  ARK Innovation ETF..............        707,292,851         16,154,806
BIL.....................................  SPDR Bloomberg 1-3 Month T-Bill         762,676,069          8,326,055
                                           ETF.
EEM.....................................  iShares MSCI Emerging Markets         1,162,016,698         29,631,030
                                           ETF.
EFA.....................................  iShares MSCI EAFE ETF...........      1,098,301,530         15,452,387
EWZ.....................................  iShares MSCI Brazil ETF.........        761,109,830         23,812,637
FXI.....................................  iShares China Large-Cap ETF.....        894,787,224         33,669,717
GDX.....................................  VanEck Gold Miners ETF..........        618,321,580         20,914,982
GLD.....................................  SPDR Gold Shares................      1,253,006,545          6,922,775
HYG.....................................  iShares iBoxx $ High Yield            2,903,997,736         39,043,244
                                           Corporate Bond ETF.
IEF.....................................  iShares 7-10 Year Treasury Bond         894,889,766          9,586,765
                                           ETF.
IEFA....................................  iShares Core MSCI EAFE ETF......        530,658,618          8,004,183
IEMG....................................  iShares Core MSCI Emerging              553,682,087         11,306,758
                                           Markets ETF.
IWM.....................................  iShares Russell 2000 ETF........      6,202,712,384         33,896,457
IYR.....................................  iShares U.S. Real Estate ETF....        574,764,729          6,905,724
JNK.....................................  SPDR Bloomberg High Yield Bond          761,813,968          8,366,332
                                           ETF.
KRE.....................................  SPDR S&P Regional Banking ETF...        730,171,702         16,549,123
KWEB....................................  KraneShares CSI China Internet          540,782,914         19,393,082
                                           ETF.
LQD.....................................  Shares iBoxx Investment Grade         2,261,500,682         21,569,358
                                           Corporate Bond ETF.
QQQ.....................................  Invesco QQQ Trust...............     18,595,359,899         50,027,506
RSP.....................................  Invesco S&P 500 Equal Weight ETF        852,555,992          5,795,082
SMH.....................................  VanEck Semiconductor ETF........      1,158,968,787          7,603,553
SOXL....................................  Direxion Daily Semiconductor          1,356,546,736         61,542,137
                                           Bull 3x Shares.
SOXS....................................  Direxion Daily Semiconductor            647,424,841         65,816,096
                                           Bear 3x Shares.
SPXL....................................  Direxion Daily S&P 500 Bull 3X          841,777,983          9,749,178
                                           Shares.
SPY.....................................  SPDR S&P 500 ETF Trust..........     34,971,417,738         79,030,726
SQQQ....................................  ProShares UltraPro Short QQQ ETF      2,319,281,990        124,445,645
TLT.....................................  iShares 20+ Year Treasury Bond        3,469,546,370         37,328,733
                                           ETF.
TNA.....................................  Direxion Daily Small Cap Bull 3X        506,756,845         15,750,951
                                           Shares.
TQQQ....................................  ProShares UltraPro QQQ..........      3,928,939,456         98,454,290
XBI.....................................  SPDR S&P Biotech ETF............        665,811,366          8,625,070

[[Page 22311]]

 
XLE.....................................  Energy Select Sector SPDR Fund..      1,708,817,762         19,948,160
XLF.....................................  Financial Select Sector SPDR          1,403,745,482         41,035,132
                                           Fund.
XLI.....................................  Industrial Select Sector SPDR         1,016,318,692          9,660,975
                                           Fund.
XLK.....................................  Technology Select Sector SPDR         1,153,958,503          6,635,138
                                           Fund.
XLP.....................................  Consumer Staples Select Sector          853,687,804         11,969,322
                                           SPDR Fund.
XLU.....................................  Utilities Select Sector SPDR          1,026,772,959         16,431,256
                                           Fund.
XLV.....................................  Health Care Select Sector SPDR        1,198,471,388          9,145,246
                                           Fund.
XLY.....................................  Consumer Discretionary Select           862,116,359          5,195,115
                                           Sector SPDR Fund.
----------------------------------------------------------------------------------------------------------------

    The Exchange believes that permitting cash settlement as a contract 
term for FLEX ETF Options for the ETFs in the above table would broaden 
the base of investors that use FLEX Equity Options to manage their 
trading and investment risk, including investors that currently trade 
in the OTC market for customized options, where settlement restrictions 
do not apply.
    Today, equity options are settled physically at The Options 
Clearing Corporation (``OCC''), i.e., upon exercise, shares of the 
underlying security must be assumed or delivered. Physical settlement 
may possess certain risks with respect to volatility and movement of 
the underlying security at expiration against which market participants 
may need to hedge. The Exchange believes cash settlement may be 
preferable to physical delivery in some circumstances as it does not 
present the same risk. If an issue with the delivery of the underlying 
security arises, it may become more expensive (and time consuming) to 
reverse the delivery because the price of the underlying security would 
almost certainly have changed. Reversing a cash payment, on the other 
hand, would not involve any such issue because reversing a cash 
delivery would simply involve the exchange of cash. Additionally, with 
physical settlement, market participants that have a need to generate 
cash would have to sell the underlying security while incurring the 
costs associated with liquidating their position as well as the risk of 
an adverse movement in the price of the underlying security.
    With respect to position and exercise limits, cash-settled FLEX ETF 
Options would be subject to the position limits set forth in proposed 
Options 3A, Section 18. Accordingly, the Exchange proposes to add 
subparagraph (b)(1)(B) of Options 3A, Section 18, which would provide 
that a position in FLEX Equity Options where the underlying security is 
an ETF that is settled in cash pursuant to Options 3A, Section 
3(c)(5)(A)(ii) shall be subject to the position limits set forth in 
Options 9, Section 13, and subject to the exercise limits set forth in 
Options 9, Section 15. The proposed rule would further state that 
positions in such cash-settled FLEX Equity Options shall be aggregated 
with positions in physically settled options on the same underlying ETF 
for the purpose of calculating the position limits set forth in Options 
9, Section 13 and the exercise limits set forth in Options 9, Section 
15.\193\ The Exchange further proposes to add in subparagraph (b)(1)(A) 
of Section 18 a cross-reference to subparagraph (b)(1)(B) of Section 
18, as subparagraph (b)(1)(B) would also contain provisions about 
position limits for FLEX Equity Options that would be exceptions to the 
statement in Options 3A, Section 18(b)(1)(A) that FLEX Equity Options 
have no position limits. The Exchange also proposes to add in paragraph 
(c) of Section 18, a cross-reference to proposed subparagraph 
(b)(1)(B), as the proposed rule adds language regarding aggregation of 
positions for purposes of position limits, which will be covered by 
paragraph (c). Given that each of the underlying ETFs that would 
currently be eligible to have cash-settlement as a contract term have 
established position and exercise limits applicable to physically 
settled options, the Exchange believes it is appropriate for the same 
position and exercise limits to also apply to cash-settled options. 
Accordingly, of the 39 underlying securities that would currently be 
eligible to have cash settlement as a FLEX contract term, 27 would have 
a position limit of 250,000 contracts pursuant to Options 9, Section 
13(d)(5).\194\ Further, pursuant to Supplementary Material .01 to 
Options 9, Section 13, six would have a position limit of 500,000 
contracts (EWZ, TLT, HYG, XLF, LQD, and GDX); four (EEM, FXI, IWM, and 
EFA) would have a position limit of 1,000,000 contracts; one (QQQ) 
would have a position limit of 1,800,000 contracts; and one (SPY) would 
have a position limit of 3,600,000.\195\
---------------------------------------------------------------------------

    \193\ See proposed Options 3A, Section 18(b)(1)(B), which is 
based on Cboe Rule 8.35(c)(1)(B). The aggregation of position and 
exercise limits would include all positions on physically settled 
FLEX and non-FLEX Options on the same underlying ETFs.
    \194\ Options 9, Section 13(d)(5) provides that to be eligible 
for the 250,000 contract limit, either the most recent six (6) month 
trading volume of the underlying security must have totalled at 
least 100 million shares or the most recent six-month trading volume 
of the underlying security must have totalled at least seventy-five 
(75) million shares and the underlying security must have at least 
300 million shares currently outstanding.
    \195\ These were based on position limits as of March 5, 2024. 
Position limits are available on at https://www.theocc.com. Position 
limits for ETFs are always determined in accordance with the 
Exchange's Rules regarding position limits.
---------------------------------------------------------------------------

    The Exchange understands that cash-settled ETF options are 
currently traded in the OTC market by a variety of market participants, 
e.g., hedge funds, proprietary trading firms, and pension funds.\196\ 
These options are not fungible with the exchange listed options. The 
Exchange believes some of these market participants would prefer to 
trade comparable instruments on an exchange, where they would be 
cleared and settled through a regulated clearing agency. The Exchange 
expects that users of these OTC products would be among the primary 
users of exchange-traded cash-settled FLEX ETF Options. The Exchange 
also believes that the trading of cash-settled FLEX ETF Options would 
allow these same market participants to better manage the risk 
associated with the volatility of underlying equity positions given the 
enhanced liquidity that an exchange-traded product would bring.
---------------------------------------------------------------------------

    \196\ As noted above, other options exchanges have received 
approval to list certain cash-settled FLEX ETF Options. See supra 
notes 186 and 187.
---------------------------------------------------------------------------

    In the Exchange's view, cash-settled FLEX ETF Options traded on the 
Exchange would have three important advantages over the contracts that 
are traded in the OTC market. First, as a result of greater 
standardization of contract terms, exchange-traded contracts should 
develop more liquidity. Second, counter-party credit risk would be 
mitigated by the fact that the contracts are issued and guaranteed

[[Page 22312]]

by OCC. Finally, the price discovery and dissemination provided by the 
Exchange and its members would lead to more transparent markets. The 
Exchange believes that its ability to offer cash-settled FLEX ETF 
Options would aid it in competing with the OTC market and at the same 
time expand the universe of products available to interested market 
participants. The Exchange believes that an exchange-traded alternative 
may provide a useful risk management and trading vehicle for market 
participants and their customers. Further, the Exchange believes 
listing cash-settled FLEX ETF Options would provide investors with 
competition on an exchange platform, as other options exchanges have 
received Commission approval to list the same options.\197\
---------------------------------------------------------------------------

    \197\ See supra notes 186 and 187.
---------------------------------------------------------------------------

    The Exchange notes that OCC has received approval from the 
Commission for rule changes that will accommodate the clearance and 
settlement of cash-settled ETF options.\198\ The Exchange has also 
analyzed its capacity and represents that it and The Options Price 
Reporting Authority (``OPRA'') have the necessary systems capacity to 
handle the additional traffic associated with the listing of cash-
settled FLEX ETF Options. The Exchange believes any additional traffic 
that would be generated from the introduction of cash-settled FLEX ETF 
Options would be manageable. The Exchange expects that members will not 
have a capacity issue as a result of this proposed rule change. The 
Exchange also does not believe this proposed rule change will cause 
fragmentation of liquidity. The Exchange will monitor the trading 
volume associated with the additional options series listed as a result 
of this proposed rule change and the effect (if any) of these 
additional series on market fragmentation and on the capacity of the 
Exchange's automated systems.
---------------------------------------------------------------------------

    \198\ See Securities Exchange Act Release No. 34-94910 (May 13, 
2022), 87 FR 30531 (May 19, 2022) (SR-OCC-2022-003).
---------------------------------------------------------------------------

    The Exchange does not believe that allowing cash settlement as a 
contract term would render the marketplace for equity options more 
susceptible to manipulative practices. The Exchange believes that 
manipulating the settlement price of cash-settled FLEX ETF Options 
would be difficult based on the size of the market for the underlying 
ETFs that are the subject of this proposed rule change. The Exchange 
notes that each underlying ETF in the table above is sufficiently 
active to alleviate concerns about potential manipulative activity. 
Further, in the Exchange's view, the vast liquidity in the 39 
underlying ETFs that would currently be eligible to be traded as cash-
settled FLEX options under the proposal ensures a multitude of market 
participants at any given time. Moreover, given the high level of 
participation among market participants that enter quotes and/or orders 
in physically settled options on these ETFs, the Exchange believes it 
would be very difficult for a single participant to alter the price of 
the underlying ETF or options overlying such ETF in any significant way 
without exposing the would-be manipulator to regulatory scrutiny. The 
Exchange further believes any attempt to manipulate the price of the 
underlying ETF or options overlying such ETF would also be cost 
prohibitive. As a result, the Exchange believes there is significant 
participation among market participants to prevent manipulation of 
cash-settled FLEX ETF Options.
    Still, the Exchange believes it has an adequate surveillance 
program in place and intends to apply the same program procedures to 
cash-settled FLEX ETF Options that it applies to the Exchange's other 
options products.\199\ FLEX options products and their respective 
symbols will be integrated into the Exchange's existing surveillance 
system architecture and will thus be subject to the relevant 
surveillance processes, as applicable. The Exchange believes that the 
existing surveillance procedures at the Exchange are capable of 
properly identifying unusual and/or illegal trading activity, which 
procedures the Exchange would utilize to surveil for aberrant trading 
in cash-settled FLEX ETF Options.
---------------------------------------------------------------------------

    \199\ For example, the regulatory program for the Exchange 
includes surveillance designed to identify manipulative and other 
improper options trading, including, spoofing, marking the close, 
front running, wash sales, etc.
---------------------------------------------------------------------------

    With respect to regulatory scrutiny, the Exchange believes its 
existing surveillance technologies and procedures adequately address 
potential concerns regarding possible manipulation of the settlement 
value at or near the close of the market. The Exchange notes that the 
regulatory program operated by and overseen by ISE \200\ includes 
cross-market surveillance designed to identify manipulative and other 
improper trading, including spoofing, algorithm gaming, marking the 
close and open, as well as more general, abusive behavior related to 
front running, wash sales, and quoting/routing, which may occur on the 
Exchange or other markets. These cross-market patterns incorporate 
relevant data from various markets beyond the Exchange and its 
affiliates and from markets not affiliated with the Exchange. The 
Exchange represents that, today, its existing trading surveillances are 
adequate to monitor trading in the underlying ETFs and subsequent 
trading of options on those securities listed on the Exchange. Further, 
with the introduction of cash-settled FLEX ETF Options, the Exchange 
would leverage its existing surveillances to monitor trading in the 
underlying ETFs and subsequent trading of options on those securities 
listed on the Exchange with respect to cash-settled FLEX ETF 
options.\201\
---------------------------------------------------------------------------

    \200\ ISE maintains a regulatory services agreements with 
Financial Industry Regulatory Authority, Inc. (``FINRA'') whereby 
FINRA provides certain regulatory services to the exchanges, 
including cross-market surveillance, investigation, and enforcement 
services.
    \201\ Such surveillance procedures generally focus on detecting 
securities trading subject to opening price manipulation, closing 
price manipulation, layering, spoofing or other unlawful activity 
impacting an underlying security, the option, or both. The Exchange 
has price movement alerts, unusual market activity and order book 
alerts active for all trading symbols.
---------------------------------------------------------------------------

    Additionally, for options, the Exchange utilizes an array of 
patterns that monitor manipulation of options, or manipulation of 
equity securities (regardless of venue) for the purpose of impacting 
options prices on the Exchange (i.e., mini-manipulation strategies). 
That surveillance coverage is initiated once options begin trading on 
the Exchange. Accordingly, the Exchange believes that the cross-market 
surveillance performed by the Exchange or FINRA, on behalf of the 
Exchange, coupled with ISE's own monitoring for violative activity on 
the Exchange comprise a comprehensive surveillance program that is 
adequate to monitor for manipulation of the underlying ETF and 
overlying option. Furthermore, the Exchange believes that the existing 
surveillance procedures at the Exchange are capable of properly 
identifying unusual and/or illegal trading activity, which the Exchange 
would utilize to surveil for aberrant trading in cash-settled FLEX ETF 
Options.
    In addition to the surveillance procedures and processes described 
above, improvements in audit trails (i.e., the Consolidated Audit 
Trail), recordkeeping practices, and inter-exchange cooperation over 
the last two decades have greatly increased the Exchange's ability to 
detect and punish attempted manipulative activities. In addition, the 
Exchange is a member of the Intermarket Surveillance Group 
(``ISG'').\202\ The ISG members work

[[Page 22313]]

together to coordinate surveillance and investigative information 
sharing in the stock and options markets. For surveillance purposes, 
the Exchange would therefore have access to information regarding 
trading activity in the pertinent underlying securities.
---------------------------------------------------------------------------

    \202\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by cooperatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
---------------------------------------------------------------------------

    The proposed rule change is designed to allow investors seeking to 
effect cash-settled FLEX ETF Options with the opportunity for a 
different method of settling option contracts at expiration if they 
choose to do so. As noted above, market participants may choose cash 
settlement because physical settlement possesses certain risks with 
respect to volatility and movement of the underlying security at 
expiration that market participants may need to hedge against. The 
Exchange believes that offering innovative products flows to the 
benefit of the investing public. A robust and competitive market 
requires that exchanges respond to members' evolving needs by 
constantly improving their offerings. Such efforts would be stymied if 
exchanges were prohibited from offering innovative products for reasons 
that are generally debated in academic literature. The Exchange 
believes that introducing cash-settled FLEX ETF Options would further 
broaden the base of investors that use FLEX Equity Options to manage 
their trading and investment risk, including investors that currently 
trade in the OTC market for customized options, where settlement 
restrictions do not apply. The proposed rule change is also designed to 
encourage market makers to shift liquidity from the OTC market onto the 
Exchange, which, it believes, would enhance the process of price 
discovery conducted on the Exchange through increased order flow. The 
Exchange also believes that this may open up cash-settled FLEX ETF 
Options to more retail investors. The Exchange does not believe that 
this proposed rule change raises any unique regulatory concerns because 
existing safeguards--such as position limits (and the aggregation of 
cash-settled positions with physically-settled positions), exercise 
limits (and the aggregation of cash-settled positions with physically-
settled positions), and reporting requirements--would continue to 
apply. The Exchange believes the proposed position and exercise limits 
may further help mitigate the concerns that the limits are designed to 
address about the potential for manipulation and market disruption in 
the options and the underlying securities.\203\
---------------------------------------------------------------------------

    \203\ See supra note 193.
---------------------------------------------------------------------------

    Given the novel characteristics of cash-settled FLEX ETF Options, 
the Exchange will conduct a review of the trading in cash-settled FLEX 
ETF Options over an initial five-year period. The Exchange will furnish 
five reports to the Commission based on this review, the first of which 
would be provided within 60 days after the first anniversary of the 
initial listing date of the first cash-settled FLEX ETF Option under 
the proposed rule and each subsequent annual report to be provided 
within 60 days after the second, third, fourth and fifth anniversary of 
such initial listing. At a minimum, each report will provide a 
comparison between the trading volume of all cash-settled FLEX ETF 
Options listed under the proposed rule and physically settled options 
on the same underlying security, the liquidity of the market for such 
options products and the underlying ETF, and any manipulation concerns 
arising in connection with the trading of cash-settled FLEX ETF Options 
under the proposed rule. The Exchange will also provide additional data 
as requested by the Commission during this five year period. The 
reports will also discuss any recommendations the Exchange may have for 
enhancements to the listing standards based on its review. The Exchange 
believes these reports will allow the Commission and the Exchange to 
evaluate, among other things, the impact such options have, and any 
potential adverse effects, on price volatility and the market for the 
underlying ETFs, the component securities underlying the ETFs, and the 
options on the same underlying ETFs and make appropriate 
recommendations, if any, in response to the reports.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\204\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act.\205\ Specifically, the Exchange believes 
the proposed rule change is consistent with the Section 6(b)(5) \206\ 
requirements that the rules of an exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities 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.
---------------------------------------------------------------------------

    \204\ 15 U.S.C. 78f(b).
    \205\ 15 U.S.C. 78f(b)(5).
    \206\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the adoption of the proposed rules 
allowing FLEX Options to trade on ISE in the manner specified above is 
consistent with the goals of the Act to remove impediments to and 
perfect the mechanism of a free and open market because it will benefit 
market participants by providing an additional venue for market 
participants to provide and seek liquidity for FLEX Options. As the 
Commission noted in its order granting FLEX trading on Cboe and what 
was then the Pacific Stock Exchange (now NYSE Arca), trading FLEX 
Options on an exchange is an alternative to trading customized options 
in OTC markets and carries with it the advantages of exchange markets 
such as transparency, parameters and procedures for clearance and 
settlement, and a centralized counterparty clearing agency.\207\ 
Therefore, the Exchange believes the proposed rule change will promote 
these same benefits for the market as a whole by providing an 
additional venue for market participants to trade customized FLEX 
Options. The Exchange believes that providing an additional venue for 
FLEX Options will be beneficial by increasing competition for order 
flow and executions.
---------------------------------------------------------------------------

    \207\ See Securities Exchange Act Release No. 36841 (February 
14, 1996), 61 FR 6666 (February 21, 1996) (SR-CBOE-95-43) (SR-PSE-
95-24) (Order Approving the Trading of Flexibly Structured Equity 
Options by CBOE and PSE).
---------------------------------------------------------------------------

    In general, transactions in FLEX Options will be subject to many of 
the same rules that currently apply to non-FLEX Options traded on the 
Exchange. In order to provide investor with the flexibility to 
designate terms of the options and accommodate the special trading of 
FLEX Options, however, the Exchange is proposing to add new rules in 
proposed Options 3A that will apply solely to FLEX Options. As noted 
above, the proposed rules are largely consistent with Cboe's rules 
pertaining to electronic FLEX Options, with certain intended 
differences primarily to align to current System behavior (and 
especially current auction behavior) to provide increased consistency 
for Members trading FLEX Options and non-FLEX Options on ISE, each as 
discussed above and below. Further, the Exchange has omitted certain 
Cboe rules from the proposed rules due to differences in scope and 
operation of FLEX trading at Cboe compared to the proposed scope and 
operation of FLEX

[[Page 22314]]

trading on ISE, each as noted above. For example, the Exchange will not 
include Cboe rule provisions related to floor trading, Asian- or 
Cliquet-settled FLEX Index Options, or Micro FLEX Index Options as it 
does not offer these capabilities today. For the same reason, the 
Exchange will not allow prices in FLEX trading to be expressed as 
percentages under this proposal.
    The Exchange further believes that its proposal is designed to 
prevent fraudulent and manipulative acts and practices as the Exchange 
believes that it has an adequate surveillance program in place and 
intends to apply the same program procedures to FLEX Options that is 
applied to the Exchange's other options products, as applicable. As 
described above, FLEX Option products and their respective symbols will 
be integrated into the Exchange's existing surveillance system 
architecture and will be subject to the relevant surveillance 
processes, thereby allowing the Exchange to properly identify 
disruptive and/or manipulative trading activity.
A. General Provisions (Section 1)
    The Exchange believes that proposed Section 1(a) setting forth the 
applicability of Exchange Rules will make clear that unless otherwise 
provided in proposed Options 3A, the Exchange's existing rules will 
continue to apply to FLEX Options, which will provide consistency for 
Members trading both FLEX Options and non-FLEX Options on ISE.
    The Exchange believes that the defined terms proposed in Section 
1(b) will provide increased clarity to Members by specifying 
definitions like ``FLEX Option'' and ``FLEX Order'' that are used 
throughout Options 3A. The Exchange further believes that adding the 
definition of ``FLEX Order'' in Options 3, Section 7(z) will add 
transparency as to which order types would be available on ISE. Lastly, 
the non-substantive change proposed in Options 3, Section 7(y) will 
bring clarity and avoid potential confusion for market participants.
B. Hours of Business (Section 2)
    The Exchange believes that specifying the trading hours for FLEX 
Options in proposed Section 2(a) will provide increased clarity that 
the trading hours for FLEX Options will generally be the same as the 
trading hours for corresponding non-FLEX Options as set forth in 
Options 3, Section 1. As noted above, the proposed language is 
materially identical to Cboe Rule 5.1(b)(3)(A).
C. FLEX Option Classes and Permissible Series (Section 3(a) and (b))
    The Exchange believes that the proposed rule text in Sections 3(a) 
and 3(b) will provide greater transparency around the Exchange's 
listing standards for FLEX Option classes and FLEX Option series. 
Proposed Section 3(b)(1), which will prevent FLEX Options and non-FLEX 
Options with the same terms from trading concurrently by System 
enforcing this restriction, is consistent with the Act because this 
restriction will address concerns that FLEX Options would act as a 
surrogate for the trading of non-FLEX Options. In particular, a non-
FLEX Option trading pursuant to Options 3 has different priority rules 
than a FLEX Option trading pursuant to proposed Options 3A.\208\ 
Allowing an option with the same terms to trade under both rules 
concurrently would result in inconsistent order handling and could 
allow the order priority of non-FLEX Orders to be circumvented. 
Therefore, the Exchange proposes to prevent this situation by 
permitting FLEX Options transactions only in options with a different 
term (exercise style, expiration date, or exercise price) than a non-
FLEX Option on the same underlying security or index that is already 
listed for trading. As noted above, the proposed language in Section 
3(a) and Section 3(b) is materially identical to Cboe Rule 4.20 and 
Rule 4.21(a), respectively.
---------------------------------------------------------------------------

    \208\ For example, the Exchange's order books will be 
inapplicable to FLEX Orders and thus certain priority provisions in 
Options 3, Section 10 applicable to non-FLEX Orders will not be 
applicable to FLEX Orders, such as the enhanced Primary Market Maker 
priority in Section 10(c)(1)(B), Preferred Market Maker priority in 
Section 10(c)(1)(C), and entitlement for orders of 5 contracts or 
fewer in Section 10(c)(1)(D). FLEX Options will instead be subject 
to the priority provisions in Options 3A, Section 11(b)(3)(A) 
(electronic FLEX Auctions), Section 12(e) (FLEX PIM), and Section 
13(e) (FLEX SOM).
---------------------------------------------------------------------------

D. FLEX Options Terms (Section 3(c))
    The Exchange believes that the terms of FLEX Options pursuant to 
proposed Options 3A, Section 3(c) serve to perfect the mechanism of a 
free and open market and a national market system because they will 
permit investors to customize some of the terms of their FLEX Options 
to implement more precise trading strategies, which may not be possible 
using non-FLEX Options. These investors may have improved capability to 
execute strategies to meet their specific investment objectives by 
using customized FLEX Options. However, only certain terms as specified 
in proposed Section 3(c) are subject to flexible structuring by the 
parties to the FLEX Option transactions, and most of such terms have a 
specified number of alternative configurations. The Exchange believes 
that these restrictions are reasonable and designed to further the 
objectives of the Act and to promote just and equitable principles of 
trade because limiting FLEX Option terms enables the efficient, 
centralized clearance and settlement and active secondary trading of 
opened FLEX Options. As noted above, these terms are consistent with 
Cboe Rule 4.21(b) except the Exchange will not incorporate applicable 
Cboe provisions relating to Asian- or Cliquet-settled FLEX Options, 
Micro FLEX Index Options, or relating to prices that are expressed as a 
percentage value because the Exchange does not offer these features 
today.
    As discussed above, the Exchange is proposing to allow the listing 
of FLEX PM Third Friday Options on ISE, consistent with the 
Commission's recent approval of Cboe's proposal to make its pilot a 
permanent program.\209\ The Exchange believes that aligning to Cboe 
will allow ISE to compete effectively with Cboe's product offering. 
Like Cboe, the Exchange believes that FLEX PM Third Friday Options will 
provide investors with greater trading opportunities and flexibility. 
The Exchange notes that the Commission recently approved proposals to 
make other pilots permitting p.m.-settlement of index options permanent 
after finding those pilots were consistent with the Act and the options 
subject to those pilots had no significant impact on the market.\210\
---------------------------------------------------------------------------

    \209\ See supra note 35.
    \210\ See Securities Exchange Act Release Nos. 98454 (September 
20, 2023) (SR-CBOE-2023-005) (order approving proposed rule change 
to make permanent the operation of a program that allows the 
Exchange to list p.m.-settled third Friday-of-the-month SPX options 
series) (``SPXPM Approval''); 98455 (September 20, 2023) (SR-CBOE-
2023-019) (order approving proposed rule change to make permanent 
the operation of a program that allows the Exchange to list p.m.-
settled third Friday-of-the-month XSP and MRUT options series) 
(``XSP and MRUT Approval''); and 98456 (September 20, 2023) (SR-
CBOE-2023-020) (order approving proposed rule change to make the 
nonstandard expirations pilot program permanent) (``Nonstandard 
Approval''). See also Securities Exchange Act Release Nos. 98450 
(September 20, 2023), 88 FR 66111 (September 26, 2023) (SR-ISE-2023-
08) (order approving proposed rule change to make permanent certain 
p.m.-settled pilots); and 98935 (November 14, 2023), 88 FR 80792 
(November 20, 2023) (SR-ISE-2023-20) (order approving a proposed 
rule change to permit the listing and trading of p.m.-settled 
Nasdaq-100 Index[supreg] Options with a third-Friday-of-the-month 
expiration).
---------------------------------------------------------------------------

    The Exchange further believes that permitting ISE to list FLEX PM 
Third Friday Options, similar to Cboe, will remove impediments to and 
perfect the mechanism of a free and open market

[[Page 22315]]

and a national market system and protect investors, while maintaining a 
fair and orderly market. As described in the FLEX Settlement Pilot 
Approval, Cboe observed no significant adverse market impact or 
identified any meaningful regulatory concerns during the nearly 14-year 
operation of the FLEX PM Third Friday Program as a pilot nor during the 
15 years since P.M.-settled index options (SPX) were reintroduced to 
the marketplace.\211\
---------------------------------------------------------------------------

    \211\ Notably, Cboe did not identify any significant economic 
impact (including on pricing or volatility or in connection with 
reversals) on related futures, the underlying indexes, or the 
underlying component securities of the underlying indexes 
surrounding the close as a result of the quantity of FLEX PM Third 
Friday Options or the amount of expiring open interest in FLEX PM 
Third Friday Options, nor any demonstrated capacity for options 
hedging activity to impact volatility in the underlying markets. See 
supra note 35.
---------------------------------------------------------------------------

    As discussed in the FLEX Settlement Pilot Approval, the DERA staff 
study and corresponding Cboe study concluded that a significantly 
larger amount of non-FLEX p.m.-settled index options had no significant 
adverse market impact and caused no meaningful regulatory concerns. 
Therefore, the Exchange believes it is reasonable to conclude that the 
relatively small amount of FLEX Index Option volume would similarly 
have no significant adverse market impact or cause no meaningful 
regulatory concerns.\212\
---------------------------------------------------------------------------

    \212\ See supra note 35. Additionally, these studies measured 
any impact on related futures, the underlying indexes, or the 
underlying component securities of the underlying indexes 
surrounding the close. Despite FLEX SPX options (which represent 
approximately half of the year-to-date 2023 volume of FLEX Index 
Options but only approximately 0.3% of total SPX volume) not being 
included in the DERA staff study and corresponding Cboe study, those 
studies concluded that during the time periods covered (which 
included the period of time in which the Pilot Program has been 
operating), there was no significant economic impact on the 
underlying index or related products. Therefore, the Exchange 
believes it is reasonable to conclude that any FLEX SPX Options that 
executed during the timeframes covered by the studies had no 
significant impact on the underlying index or related products, as 
neither DERA staff nor Cboe observed any significant economic impact 
on the underlying index or related product.
---------------------------------------------------------------------------

    The Exchange also believes the introduction of FLEX PM options had 
no significant impact on the market quality of corresponding a.m.-
settled options or other options. As discussed in the FLEX Settlement 
Pilot Approval, Cboe's analysis conducted after the introduction of 
SPXW options with Tuesday and Thursday expirations demonstrated no 
statistically significant impact on the bid-ask or effective spreads of 
SPXW options with Monday, Wednesday, and Friday expirations after 
trading in the SPXW options with Tuesday and Thursday expirations 
began.\213\ Further, Cboe concluded that large FLEX PM Third Friday 
Options trades had no material negative impact (and likely no impact) 
on quote quality of non-FLEX a.m.-settled options overlying the same 
index with similar terms as the FLEX PM Third Friday Option upon 
evaluating data that showed that the spreads were relatively stable 
before and after large trades.\214\ Therefore, the Exchange believes 
Cboe's evaluation effectively demonstrates it is likely that FLEX PM 
Third Friday Options have had no significant negative impact on the 
market quality of non-FLEX Options with a.m.-settlement.\215\
---------------------------------------------------------------------------

    \213\ See supra note 35.
    \214\ Specifically, Cboe evaluated each FLEX PM Third Friday 
Options trade for more than 500 contracts that occurred on Cboe 
during a two-year timeframe and analyzed the market quality 
(specifically, the average time-weighted quote spread and size 30 
minutes prior to the trade and the average time-weighted quote 
spread and size 30 minutes after the trade) of series non-FLEX a.m.-
settled options overlying the same index with similar terms as the 
FLEX PM Third Friday Option that traded (time to expiration, type 
(call or put), and strike price) as set forth in the Cboe's data. 
See supra note 35.
    \215\ The Exchange acknowledges that, while FLEX PM Third Friday 
Options has historically represented a very small percentage of 
overall volume, it is possible trading in these options may grow in 
the future.
---------------------------------------------------------------------------

    Additionally, the significant changes in the closing procedures of 
the primary markets in recent decades, including considerable advances 
in trading systems and technology, has significantly minimized risks of 
any potential impact of FLEX PM Third Friday Options on the underlying 
cash markets. As such, the Exchange believes that this proposal does 
not raise any unique or prohibitive regulatory concerns and that such 
trading has not, and will not, adversely impact fair and orderly 
markets on expiration Fridays for the underlying indexes or their 
component securities.
E. FLEX Fungibility (Section 3(d))
    The Exchange believes that the FLEX fungibility provisions in 
proposed Options 3A, Section 3(d) are consistent with the Act by 
preventing new FLEX Option positions from being opened when a non-FLEX 
Option with the same terms is listed for trading. Pursuant to proposed 
Section 3(d)(1), a FLEX Option with the same terms as a subsequently 
added non-FLEX Option would become fungible with the non-FLEX Option. 
Accordingly, once a non-FLEX Option is added with the same terms as an 
outstanding FLEX Option, the FLEX Option would effectively become a 
standardized, non-FLEX Option and trade under the same rules and 
procedures that apply to any other standard non-FLEX Option. The 
Exchange believes that enforcing consistent order handling for 
identical and fungible options prevents fraudulent and manipulative 
acts and practices, and promotes just and equitable principles of trade 
to protect investors and the public interest by ensuring consistent 
treatment of these options. As noted above, proposed Section 3(d)(1) is 
materially identical to Cboe Rule 4.22(a).
    As noted above, the Exchange will not incorporate language from 
Cboe Rule 4.22(b) related to closing only transactions for FLEX Option 
series that become fungible with identical non-FLEX Option series. 
Pursuant to proposed Options 3A, Section 3(d)(2), the Exchange will not 
allow intra-day additions of non-FLEX Options in the same series with 
identical terms as an already-listed FLEX Option series for the 
remainder of the trading day. In such instances, the non-FLEX Option 
series could be added overnight to begin trading the the next trading 
day (upon which all existing open positions in the FLEX Option would 
become fully fungible with transactions in the identical non-FLEX 
Option series, and any further trading in the series would be as non-
FLEX Options subject to non-FLEX trading procedures and Rules). The 
Exchange believes its proposal will be a straightforward process that 
ensures consistent treatment of FLEX Options with identical, fungible 
non-FLEX Options.
F. Units of Trading; Minimum Trading Increments (Sections 4 and 5)
    The Exchange believes that the proposed rule text in Section 4(a) 
provides clear, transparent language regarding how bids and offers for 
FLEX Options must be expressed. As noted above, proposed Section 4(a) 
is consistent with Cboe Rule 5.3(e)(3) except the Exchange is not 
proposing to provide for Micro FLEX Index Options or to allow prices to 
be expressed as a percentage value because the Exchange does not offer 
these features today.
    The Exchange similarly believes that proposed Section 5(a) provides 
clarity to market participants that the Exchange will determine the 
minimum increments for bids and offers on FLEX Options on a class-by-
class basis, which may be no smaller than $0.01. Allowing FLEX Options 
to trade in increments as small as $0.01 is consistent with the Act 
because it provides investors with increased ability to meet their 
specific investment objectives and allows for increased opportunities 
for price

[[Page 22316]]

improvement through a finer trading increment. As noted above, proposed 
Section 5(a) is consistent with Cboe Rule 5.4(c)(4) except the Exchange 
is not proposing to allow prices to be expressed as a percentage value.
G. Types of Orders; Order and Quote Protocols (Section 6)
    The Exchange believes that specifying in proposed Section 6(a) that 
it may make the order types and times-in-force specified in Options 3, 
Section 7 available on a class or System basis for FLEX Orders is 
consistent with the Exchange's existing authority to designate the 
availability of order types and times-in-force for non-FLEX 
Orders.\216\
---------------------------------------------------------------------------

    \216\ See introductory paragraph to Options 3, Section 7.
---------------------------------------------------------------------------

    The Exchange further believes proposed Section 6(b) will provide 
greater transparency as to which existing order and quote protocols 
would be available for FLEX Orders, FLEX auction notifications, and 
FLEX auction responses.
H. Complex Orders (Section 7)
    The Exchange believes the proposed Section 7 will provide investors 
with additional transparency regarding order entry requirements for 
complex FLEX Options. As noted above, the proposed complex FLEX Order 
entry requirements will be consistent with Cboe Rule 5.70(b), except 
the Exchange will not offer Asian-settled or Cliquet-settled FLEX Index 
Options.
    The Exchange also believes that allowing the submission of complex 
FLEX Orders with any ratio will remove impediments to and perfect the 
mechanism of a free and open market and benefit investors, because it 
will provide Members with additional flexibility and precision in their 
investment strategies. As noted above, Cboe already offers this feature 
for complex FLEX Orders, so the Exchange believes that the proposed 
changes will promote a free and open market and a national market 
system by providing an additional venue for market participants to 
execute complex FLEX Orders with any ratio.\217\
---------------------------------------------------------------------------

    \217\ See supra note 54.
---------------------------------------------------------------------------

I. Opening of FLEX Trading (Section 8)
    The Exchange believes that proposed Section 8, which will specify 
that there will be no Opening Process in FLEX Options and that Members 
may begin submitting FLEX Orders into an electronic FLEX Auction, a 
FLEX PIM, or a FLEX SOM when the underlying security is open for 
trading, will provide clarity to market participants regarding the 
mechanisms available for FLEX trading. The Exchange will not conduct an 
Opening Process in FLEX Options due to the customized nature of these 
products and the fact that there will be no requirement for specific 
FLEX Option series to be quoted or traded each day. The Exchange notes 
that Cboe likewise does not hold an opening trading rotation in FLEX 
Options.\218\
---------------------------------------------------------------------------

    \218\ See Cboe Rule 5.71. See supra note 55.
---------------------------------------------------------------------------

    The Exchange also believes that allowing Member to begin submitting 
FLEX Orders once the underlying security is open is appropriate. 
Because market participants incorporate transaction prices of 
underlying securities or the values of underlying indexes when pricing 
options (which will include FLEX Options), the Exchange believes it 
will benefit investors for FLEX Options trading to not be available 
until that information has begun to be disseminated in the market. 
Because the Exchange will have no electronic book of resting orders for 
FLEX Options (and no Opening Process), being ``open'' for FLEX trading 
merely means that Members may submit FLEX Orders into one of the 
specified FLEX auction mechanisms once the underlying is open, at the 
conclusion of which executions in those auction mechanisms may occur 
(which are all discussed in the respective FLEX Auction, FLEX PIM, and 
FLEX SOM sections above).
J. Trading Halts (Section 9)
    The Exchange believes that proposed Section 9 will provide clarity 
as to when the Exchange would halt trading in FLEX Options. The reasons 
why the Exchange would halt trading in a non-FLEX Option class (e.g., 
trading in the underlying security is halted) would generally be 
reasons why the Exchange would halt a FLEX Option class, and therefore 
the Exchange will always halt trading in a FLEX Option class when 
trading in a non-FLEX Option class with the same underlying equity 
security or index is halted on the Exchange. Proposed Section 9 also 
provides the Exchange with authority to halt trading in a FLEX Option, 
even if trading in a non-FLEX Option with the same underlying is not 
halted. While such situation would be rare, there may be unusual 
circumstances that would cause the Exchange to halt trading in the FLEX 
Option. As noted above, the proposed halt provisions are consistent 
with Cboe Rule 4.21(a)(3).
K. Exchange Order Books (Section 10)
    The Exchange believes that specifying in proposed Section 10 that 
the Exchange's simple and complex order books will not be available for 
transactions in FLEX Options will make clear what mechanisms would be 
available for FLEX trading (or not). FLEX Orders may only be submitted 
into a FLEX Auction, FLEX PIM, or FLEX SOM. As noted above, proposed 
Section 10 is consistent with the FLEX rules of other options exchanges 
that similarly do not contemplate the interaction of their respective 
order books with FLEX transactions.\219\
---------------------------------------------------------------------------

    \219\ See supra note 60.
---------------------------------------------------------------------------

L. FLEX Options Trading (Section 11)
    The Exchange believes that proposed Section 11(a), which specifies 
the requirements for submitting FLEX Orders for trading, is consistent 
with the Act. Proposed Section 11(a) will set forth which mechanisms 
would be available for FLEX Orders (i.e., electronic FLEX Auction, FLEX 
PIM, or FLEX SOM) and the order entry requirements for simple and 
complex FLEX Orders. As noted above, these provisions will be 
substantially similar to Cboe Rule 5.72(b).\220\ The Exchange believes 
that System-enforcing the stipulation that it will not accept simple or 
complex FLEX Orders if the order or leg, as applicable, has identical 
terms as a non-FLEX Option series that is already listed for trading 
will prevent options with the same terms to trade as both a FLEX 
Options and non-FLEX Option, thereby eliminating any potential concerns 
around inconsistent order handling.
---------------------------------------------------------------------------

    \220\ See supra notes 61-64.
---------------------------------------------------------------------------

    The Exchange believes that the electronic FLEX Auction as described 
in proposed Section 11(b) will remove impediments to and perfect the 
mechanism of a free and open market, and protect investors and the 
public interest. The proposed FLEX Auction will offer market 
participants with an auction mechanism for the execution of FLEX 
Options at potentially improved prices that is substantially similar in 
all respects to Cboe Rule 5.72(c), except for certain intended 
differences to align to current auction functionality in order to allow 
the proposed FLEX Auction to fit more seamlessly into the Exchange's 
market. For instance, the Exchange will not allow prices to be 
expressed as percentages in the electronic FLEX Auction as it does not 
have this capability today. The Exchange will also follow current non-
FLEX auction behavior by allowing the FLEX Auction to end at the market 
close with an

[[Page 22317]]

execution (if an execution is permitted pursuant to proposed Section 
11(b)) in the event the designated exposure interval exceeds the market 
close.\221\ In doing so, the Exchange's proposal will promote 
executions in electronic FLEX Auctions while also preventing executions 
after the market close. The Exchange will also align the minimum 
increment requirements in proposed Section 11(b)(1)(G) for stock-tied 
FLEX complex strategies with its existing requirements for stock-tied 
non-FLEX complex strategies in Options 3, Section 14(c)(1). 
Furthermore, pursuant to proposed Section 11(b)(2)(D), the Exchange 
would not allow Members to submit multiple FLEX responses using the 
same badge/mnemonic and would also not aggregate all of those responses 
at the same price in order to align to current auction functionality 
for non-FLEX Orders. Additionally, the Exchange will also specify in 
proposed Section 11(b)(2)(D) that an additional FLEX response from the 
same badge/mnemonic for the same auction ID will automatically replace 
the previous FLEX response.\222\ The Exchange will also align the 
proposed FLEX Auction allocation methodology (i.e., Priority Customer 
Size Pro-Rata and one contract allocation) \223\ and related rounding 
(i.e., rounding up for the higher response quantity) \224\ with current 
auction functionality in those respects.\225\ The Exchange believes 
that the proposed priority and allocation rules for the FLEX Auction 
will ensure a fair and orderly market by maintaining the priority of 
orders and protecting Priority Customer orders, while still affording 
the opportunity for price improvement during each FLEX Auction 
commenced on the Exchange. As noted above, all of the foregoing 
features are harmonized with the Exchange's current auction 
functionality for non-FLEX Orders, including PIM and SOM, so the 
Exchange believes that this will promote consistency for Members 
participating across different auctions on ISE.
---------------------------------------------------------------------------

    \221\ See proposed Options 3A, Section 11(b)(1)(F). While the 
current rules are silent in this regard, the Exchange notes that its 
proposal will follow current SOM and PIM behavior. See generally 
Options 3, Sections 11(d) and 13.
    \222\ While this behavior is not specified in the Exchange's 
current rules, auction responses are currently handled in the same 
manner for SOM and PIM. See generally Options 3, Sections 11(d)(2) 
and 13(c).
    \223\ See proposed Options 3A, Sections 11(b)(3)(A)(i) and 
(iii).
    \224\ See proposed Options 3A, Sections 11(b)(3)(A)(ii).
    \225\ See, e.g., Options 3, Section 11(d)(3)(C) (SOM allocation 
methodology); Options 3, Section 13(d) (PIM allocation methodology); 
Supplementary Material .09 to Options 3, Section 11; and 
Supplementary Material .10 to Options 3, Section 13.
---------------------------------------------------------------------------

    Furthermore, unlike Cboe, the Exchange will not include certain 
details in the proposed FLEX Auction notification message in proposed 
Section 11(b)(2)(A) like what time the auction will conclude or whether 
the FLEX Order is Attributable. For simplicity, the Exchange will 
instead disseminate the duration of the exposure interval, instead of 
calculating and disseminating what time the auction will conclude, and 
will not offer an Attributable designation for FLEX Orders.
    Otherwise, the general framework of the proposed electronic FLEX 
Auction in Section 11(b) (such as the eligibility requirements, the 
auction process and conclusion, and execution provisions) is consistent 
with the framework for Cboe's electronic FLEX Auctions in Cboe Rule 
5.72(c). The clarity in how the proposed FLEX Auction will function and 
its consistency with similar auctions at another exchange will help 
promote a fair and orderly national options market system.
    Like Cboe, the Exchange believes that the proposed auction exposure 
interval periods strike an appropriate balance between allowing 
executions of FLEX Orders to be completed in a timely fashion and 
providing Members sufficient time to price the unique terms of FLEX 
Options. As noted above, the submitting Member must designate the 
length of the exposure interval (which will be included in the auction 
notification message) to be between three seconds and five minutes, 
which is identical to Cboe's range of exposure intervals for their 
electronic FLEX Auctions in Cboe Rule 5.72(c)(1)(F). The Exchange 
believes it is appropriate to require the submitting Member to 
establish the length of the auction period (which will be included in 
the auction notification message), as the Member is in the best 
position to determine a reasonable period of time to provide other 
Members to respond based on the complexity of the FLEX Option series 
that is the subject of the auction, as well as based on market 
conditions (for example, in a volatile market, the Member may believe 
it is in the best interests of a customer to have a shorter auction 
period given quickly changing prices).
    The Exchange believes that the proposed rule change to allow 
multiple electronic FLEX Auctions overlap will benefit investors, as it 
may lead to an increase in Exchange volume and permit the Exchange to 
compete with the OTC market, while providing for additional 
opportunities for price discovery and execution. Although electronic 
FLEX Auctions will be allowed to overlap, the Exchange does not believe 
that this raises any issues that are not addressed through the proposal 
as described above. For example, although overlapping, each auction 
will be started in a sequence and with a time that will determine its 
processing. Thus, even if there are two auctions that commence and 
conclude, at nearly the same time, each auction will have a distinct 
conclusion at which time the auction will be allocated. Additionally, 
FLEX Orders submitted into an electronic FLEX Auction will be able to 
execute only against FLEX responses submitted to that auction. If 
market participants desire to have interest execute against both FLEX 
Orders subject to concurrent FLEX Auctions, market participants may 
submit responses to both auctions. Additionally, the proposed 
concurrent auction feature is materially identical to Cboe's electronic 
FLEX Auction feature in Cboe Rule 5.72(c)(2)(B).
M. FLEX PIM and FLEX SOM (Sections 12 and 13)
    The Exchange believes that the FLEX PIM and FLEX SOM Auctions as 
described in proposed Sections 12 and 13, respectively, will remove 
impediments to and perfect the mechanism of a free and open market, and 
protect investors and the public interest. The proposed FLEX PIM and 
FLEX SOM Auctions will offer market participants with auction 
mechanisms for the execution of FLEX Options at potentially improved 
prices that are substantially similar to Cboe's FLEX AIM and FLEX SAM 
set forth in Cboe Rule 5.73 and 5.74, respectively, except for certain 
intended differences to align to the Exchange's current PIM and SOM 
auction functionality to allow the proposed FLEX PIM and SOM Auctions 
to fit more seamlessly into the Exchange's market. For instance, the 
Exchange will not allow prices to be expressed as percentages in FLEX 
PIM or FLEX SOM as it does not have this capability today. For FLEX 
SOM, the Exchange will not allow the Solicited Order to be comprised of 
multiple solicited orders in FLEX SOM to be consistent with current 
non-FLEX SOM functionality in Options 3, Section 11(d). The Exchange 
will also align the minimum increment requirements for stock-tied FLEX 
complex strategies submitted into FLEX PIM or FLEX SOM with its 
existing requirements for stock-tied non-FLEX complex strategies in 
Options 3, Section 14(c)(1). The Exchange will also follow current non-
FLEX PIM and SOM behavior by

[[Page 22318]]

allowing the FLEX PIM or FLEX SOM Auction to end at the market close 
with an execution (if an execution is permitted pursuant to proposed 
Section 12 or Section 13, as applicable) in the event the designated 
length of the auction period exceeds the market close.\226\ In doing 
so, the Exchange's proposal will promote executions in FLEX PIM and 
FLEX SOM while also preventing executions after the market close. 
Furthermore, pursuant to Sections 12(c)(5)(B) and 13(c)(5)(B) (as 
applicable), the Exchange would not allow Members to submit multiple 
FLEX PIM or FLEX SOM responses using the same badge/mnemonic and would 
also not aggregate all of those responses at the same price in order to 
align to current PIM and SOM functionality for non-FLEX Orders. 
Additionally, the Exchange will also specify that an additional FLEX 
PIM or SOM response from the same badge/mnemonic for the same auction 
ID will automatically replace the previous FLEX PIM or SOM 
response.\227\ The Exchange will also align to current PIM 
functionality by allowing a limited exception to the restriction in 
proposed Section 12(c)(4) against modifying or canceling a FLEX PIM 
Agency Order or Initiating Order by allowing Initiating Members to 
improve the price of their Initiating Orders.\228\ The Exchange will 
also align to current SOM functionality by allowing Initiating Members 
to cancel (but not modify) their FLEX SOM Agency Orders and Solicited 
Orders pursuant to proposed Section 13(c)(4).\229\
---------------------------------------------------------------------------

    \226\ See proposed Options 3A, Sections 12(c)(3) and 13(c)(3). 
While the current rules are silent in this regard, the Exchange 
notes that its proposal will follow current SOM and PIM behavior. 
See generally Options 3, Sections 11(d) and 13.
    \227\ While this behavior is not specified in the Exchange's 
current rules, auction responses are currently handled in the same 
manner for SOM and PIM. See generally Options 3, Sections 11(d)(2) 
and 13(c).
    \228\ See supra note 102 and accompanying text.
    \229\ As noted above, while this feature is not explicitly 
stated in the current SOM rules in Options 3, Section 13(d), it is 
consistent with current SOM functionality.
---------------------------------------------------------------------------

    The Exchange will also align certain aspects of the proposed FLEX 
PIM allocation methodology with its current non-FLEX PIM allocation 
methodology. First, the Exchange will base the allocation percentages 
set forth in proposed Section 12(e)(1)(B)(ii) on the original size of 
the Agency Order, instead of the number of contract remaining after 
execution against Priority Customer responses like Cboe Rule 
5.73(e)(1)(B)(ii). As noted above, this will align to current PIM 
behavior in Options 3, Section 13(d)(3). Second, the Exchange will 
specify two limited scenarios in proposed Section 12(e)(1)(B) where the 
Initiating Member could receive an allocation percentage that is 
greater than the Initiating Member's guaranteed allocation (i.e., when 
there are remaining contracts after including all PIM responses or when 
rounding up). As noted above, while Cboe does not have these exceptions 
noted in Cboe Rule 5.73(e)(1)(B), this will be consistent with current 
PIM behavior.\230\ Third, the Exchange will specify in proposed Section 
12(e)(2)(B) that other FLEX PIM responses at prices better than the 
final auction price will be allocated in time priority and all other 
FLEX PIM responses at the final auction price will be allocated on a 
Size Pro-Rata Basis.\231\ Fourth, the Exchange will replace Cboe's last 
priority allocation in Cboe Rule 5.73(e)(4) with a guaranteed 
allocation feature in proposed Section 12(e)(4), which will be similar 
to a current PIM feature currently in Options 3, Section 13(d)(3) that 
allows Members to request a lower percentage than their guaranteed 
allocation.\232\ For both FLEX PIM and FLEX SOM, the Exchange will also 
specify that if an allocation would result in less than one contract, 
then one contract will be allocated.\233\ This would align to current 
SOM and PIM allocation.\234\ As noted above, all of the foregoing 
features are consistent with the Exchange's current PIM and SOM auction 
functionality for non-FLEX Orders, so the Exchange believes that this 
will promote consistency for Members participating across different 
auctions on ISE.
---------------------------------------------------------------------------

    \230\ See supra note 114.
    \231\ See supra note 118.
    \232\ See supra note 121.
    \233\ See proposed Supplementary Material .03 to Options 3A, 
Section 11 and Supplementary Material .03 to Options 3A, Section 12.
    \234\ See Supplementary Material .09 to Options 3, Section 11 
and Supplementary Material .10 to Options 3, Section 13).
---------------------------------------------------------------------------

    Otherwise, the general frameworks of the proposed FLEX PIM and FLEX 
SOM Auctions in Sections 12 and 13 (such as the eligibility 
requirements, stop price requirements, auction process and conclusion, 
and execution provisions) are consistent with the frameworks for Cboe's 
FLEX AIM and FLEX SAM in Cboe Rules 5.73 and 5.74, respectively. The 
clarity in how FLEX PIM and FLEX SOM will function and their 
consistency with similar auctions at another exchange will help promote 
a fair and orderly national options market system. For example, the 
proposed range for the length of each of the FLEX PIM and FLEX SOM 
Auction periods is consistent with the range for the auction periods of 
the Cboe's FLEX AIM and FLEX SAM Auctions in Cboe Rules 5.73(c)(3) and 
5.74(c)(3), respectively. Like Cboe, the Exchange believes it is 
appropriate to provide a reasonable and sufficient amount of time in 
which market participants may submit responses because of the unique 
terms of FLEX Options. Therefore, the Exchange is proposing that the 
minimum length of a FLEX PIM or FLEX SOM Auction be three seconds. The 
Exchange also proposes a maximum length of an auction period to be five 
minutes, as the Exchange also believes it is appropriate to provide for 
efficient and timely executions so that customers do not potentially 
miss a market. The proposed rule change also requires the Initiating 
Member to establish the length of the auction period (which will be 
included in the auction notification message), as the Member is in the 
best position to determine a reasonable period of time to provide other 
Members to respond based on the complexity of the FLEX Option series 
that is the subject of the auction, as well as based on market 
conditions (for example, in a volatile market, the Member may believe 
it is in the best interests of a customer to have a shorter auction 
period given quickly changing prices).
    The proposal will also allow FLEX PIM and FLEX SOM Auctions to 
occur concurrently with other FLEX PIM and FLEX SOM Auctions. As 
discussed above, the Exchange is aligning with current Cboe FLEX AIM 
and FLEX SAM behavior in Cboe Rules 5.73(c)(1) and 5.74(c)(1), 
respectively. Like Cboe, the Exchange does not believe that allowing 
FLEX PIM and FLEX SOM Auctions to overlap would raise any issues that 
are not addressed by proposal. For example, although overlapping, each 
FLEX PIM or FLEX SOM Auction will be started in a sequence and with a 
duration that determines its processing. Thus, even if there are two 
FLEX PIM or FLEX SOM Auctions that commence and conclude, at nearly the 
same time, each Auction will have a distinct conclusion at which time 
the Auction will be allocated, and only against responses submitted 
into that Auction. As discussed above, each FLEX PIM or FLEX SOM 
response is required to specifically identify the FLEX PIM or FLEX SOM 
Auction, respectively, for which it is targeted and if not fully 
executed, will be cancelled back at the conclusion of the Auction. 
Thus, responses will be specifically considered and executed only in 
the specified Auction. As a general matter, issues with concurrent 
auctions can relate to the interaction of auctioned orders with contra-
side interest resting

[[Page 22319]]

on the book at the end of various auctions. As noted above, there will 
be no order book available for FLEX trading, so there can be no 
conflict among contra-side interest resting on the book and FLEX PIM or 
FLEX SOM responses with respect to executions. Further, because there 
is no book for FLEX Options, there are no events that cause a FLEX PIM 
or FLEX SOM to conclude prior to the end of auction exposure period 
that would result in an execution, and therefore, the same event could 
not cause multiple auctions to conclude early.
    Like Cboe, the Exchange will apply a Size Pro-Rata execution 
algorithm with a Priority Customer overlay for FLEX PIM and FLEX 
SOM.\235\ The Exchange believes that the proposed priority and 
allocation rules for FLEX PIM and FLEX SOM will ensure a fair and 
orderly market by maintaining the priority of orders and protecting 
Priority Customer orders, while still affording the opportunity for 
price improvement during each FLEX PIM and FLEX SOM Auction commenced 
on the Exchange.
---------------------------------------------------------------------------

    \235\ See proposed Options 3A, Sections 12(e) and 13(e). As 
noted above, this is also consistent with the Exchange's current 
priority and allocation methodology for non-FLEX auctions, including 
SOM and PIM. See Options 3, Section 11(d)(3)(C) and Section 13(d).
---------------------------------------------------------------------------

N. Risk Protections (Section 14)
    The Exchange believes that specifying the risk protections in 
proposed Options 3A, Section 14 will benefit investors with additional 
transparency regarding which of the Exchange's risk protections in 
Options 3, Sections 15 (simple order risk protections, 16 (complex 
order risk protections), and 28 (optional risk protections) would apply 
to FLEX trading. The Exchange also believes that applying the foregoing 
risk protections to FLEX Options will protect investors and the public 
interest, and maintain fair and orderly markets, by providing market 
participants with more tools to manage their risk. In addition, 
providing Members with more tools for managing risk facilitates 
transactions in FLEX Options because Members will have more confidence 
that risk protections are in place. As a result, apply the foregoing 
risk protections has the potential to promote just and equitable 
principles of trade.
O. Data Feeds (Section 15)
    The Exchange believes that specifying the data feeds in proposed 
Options 3A, Section 15 will benefit investors with additional 
transparency regarding which data fees it will disseminate auction 
notifications for simple and complex FLEX Orders. As discussed above, 
the Exchange proposes to disseminate auction notifications for simple 
FLEX Orders through the Order Feed and auction notifications for 
complex FLEX Orders through the Spread Feed, which will be consistent 
with how non-FLEX simple and complex auction notifications are 
disseminated today.
P. FLEX Market Makers and Letters of Guarantee (Sections 16 and 17)
    The Exchange believes that the proposed FLEX Market Maker 
provisions in Section 16 will provide clarity and transparency as to 
how FLEX Market Makers are appointed and their related obligations. As 
noted above, these provisions are substantially similar to other 
options exchanges, notably Cboe and Phlx.\236\
---------------------------------------------------------------------------

    \236\ See supra notes 160-162.
---------------------------------------------------------------------------

    Pursuant to proposed Section 17, the Exchange's current Letter of 
Guarantee will effectively apply to FLEX transactions executed on 
ISE.\237\ The Exchange believes that the existing Letter of Guarantee 
continues to protect investors and the public interest because it 
signifies that the clearing member has accepted financial 
responsibility for transactions in all options entered into by the 
Market Maker, which will protect the counterparties of those trades and 
such protections will flow to other clearing members and ultimately to 
the OCC as the central counterparty and guarantor of both FLEX and non-
FLEX Option transactions.
---------------------------------------------------------------------------

    \237\ Today, all ISE Market Makers are required to enter into a 
Letter of Guarantee pursuant to Options 6, Section 4. This letter 
will automatically extend to FLEX transactions. Cboe Rule 3.61(e) 
separately requires FLEX Market Makers to provide a Letter of 
Guarantee issued by a clearing member and filed with the Exchange 
accepting responsibility for all FLEX transactions made by the FLEX 
Market Maker.
---------------------------------------------------------------------------

Q. Position and Exercise Limits (Sections 18 and 19)
    Position and exercise limits are designed to address potential 
manipulative schemes and adverse market impacts surrounding the use of 
options, such as disrupting the market in the security underlying the 
options. While position and exercise limits should address and 
discourage the potential for manipulative schemes and adverse market 
impact, if such limits are set too low, participation in the options 
market may be discouraged. The Exchange believes that any decision 
regarding imposing position and exercise limits for FLEX Options must 
therefore be balanced between mitigating concerns of any potential 
manipulation and the cost of inhibiting potential hedging activity that 
could be used for legitimate economic purposes.
    As it relates to FLEX Index Options, the Exchange believes that the 
proposed position and exercise limits in Sections 18(a), 18(c), and 
19(a) are reasonably designed to prevent a Member from using FLEX Index 
Options to evade the position limits applicable to comparable non-FLEX 
Index Options. Further, by establishing the proposed position and 
exercise limits for FLEX Index Options and, importantly, aggregating 
such positions in the manner described in proposed Sections 18(c)(1), 
(c)(2), and 19(a)(3), the Exchange believes that the position and 
exercise limit requirements for FLEX Index Options should help to 
ensure that the trading of FLEX Index Options would not increase the 
potential for manipulation or market disruption and could help to 
minimize such incentives. The Exchange also notes that proposed 
position and exercise limits are consistent with the rules of other 
options exchanges that offer FLEX Index Options, and therefore raise no 
novel issues for the Commission.\238\
---------------------------------------------------------------------------

    \238\ See Phlx Options 8, Section 34(e) and Cboe Rules 8.35(a), 
(d), and 8.42(g).
---------------------------------------------------------------------------

    As it relates to FLEX Equity Options, while no position limits are 
proposed for FLEX Equity Options, there are several mitigating factors, 
which include aggregation of FLEX Equity Option and non-FLEX Equity 
Option positions that expire on a third Friday-of-the-month and 
subjecting those positions to position and exercise limits, and daily 
monitoring of market activity. Similar to the other exchanges that 
trade FLEX Equity Options, the Exchange believes that eliminating 
position and exercise limits for FLEX Equity Options, while requiring 
positions in FLEX Equity Options that expire on a third Friday-of-the-
month to be aggregated with positions in non-FLEX Equity Options on the 
same underlying security,\239\ removes impediments to and perfects the 
mechanism of a free and open market and a national market system 
because it allow the Exchange to create a product and market that is an 
improved but comparable alternative to the OTC market in customized 
options. OTC transactions occur through bilateral agreements, the terms 
of which are not publicly disclosed to the marketplace. As such, OTC 
transactions do not contribute to the price discovery process that 
exists on a public exchange.
---------------------------------------------------------------------------

    \239\ See proposed Options 3A, Section 18(c)(3) and Section 
19(a)(3). See also Cboe Rules 8.35(d)(3) and 8.42(g)(3); NYSE Arca 
Rules 5.35-O(a)(iii), (b) and 5.36-O; NYSE American Rules 906G and 
907G; and Phlx Options 8, Section 34(e) and (f).

---------------------------------------------------------------------------

[[Page 22320]]

    The Exchange believes that the proposed elimination of position and 
exercise limits for FLEX Equity Options may encourage market 
participants to transfer their liquidity demands from OTC markets to 
exchanges and enable liquidity providers to provide additional 
liquidity to ISE through transactions in FLEX Equity Options. The 
Exchange notes that the Commission previously approved the elimination 
of position and exercise limits for FLEX Equity Options, finding that 
such elimination would allow exchanges ``to better compete with the 
growing OTC market in customized equity options, thereby encouraging 
fair competition among brokers and dealers and exchange markets.'' 
\240\ The Commission has also stated that the elimination of position 
and exercise limits for FLEX Equity Options ``could potentially expand 
the depth and liquidity of the FLEX equity market without significantly 
increasing concerns regarding intermarket manipulations or disruptions 
of the options or the underlying securities.'' \241\
---------------------------------------------------------------------------

    \240\ See Securities Exchange Act Release No. 42223 (December 
10, 1999), 64 FR 71158, 71159 (December 20, 1999) (SR-Amex-99-40) 
(SR-PCX-99-41) (SR-CBOE-99-59) (Order Granting Accelerated Approval 
to Proposed Rule Change Relating to the Permanent Approval of the 
Elimination of Position and Exercise Limits for FLEX Equity 
Options).
    \241\ See id.
---------------------------------------------------------------------------

    Additionally, the Exchange believes that requiring positions in 
FLEX Equity Options that expire on a third Friday-of-the-month to be 
aggregated with positions in non-FLEX Equity Options on the same 
underlying security subjects FLEX Equity Options and non-FLEX Equity 
Options to the same position and exercise limits on third Friday-of-
the-month expirations. These limitations are intended to serve as a 
safeguard against potential adverse effects of large FLEX Equity Option 
positions expiring on the same day as non-FLEX Equity Option positions. 
As noted above, Cboe Rules 8.35(d)(3) and 8.42(g)(3) have the same 
requirements.
    The Exchange believes that any potential risk of manipulative 
activity is mitigated by existing surveillance technologies, 
procedures, and reporting requirements at the Exchange, which allows 
the Exchange to properly identify disruptive and/or manipulative 
trading activity. In addition to its own surveillance programs, the 
Exchange also works with other SROs and exchanges on intermarket 
surveillance related issues. Through its participation in ISG, the 
Exchange shares information and coordinates inquiries and 
investigations with other exchanges designed to address potential 
intermarket manipulation and trading abuses. The Exchange also notes 
that FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement.\242\ The Exchange 
also represents that it is reviewing its procedures to detect potential 
manipulation in light of any changes required for FLEX Options to 
confirm appropriate surveillance coverage. These procedures utilize 
daily monitoring of market activity via automated surveillance 
techniques to identify unusual activity in both options and their 
underlying securities and are designed to protect investors and the 
public interest by ensuring that the Exchange has an adequate 
surveillance program in place.
---------------------------------------------------------------------------

    \242\ The Exchange notes that it is responsible for FINRA's 
performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The Exchange believes that proposed Section 18(b)(2) and (3) 
further mitigates concerns for potential market manipulation and/or 
disruption in the underlying markets and thus protects investors and 
the public interest because position reporting will be required (other 
than for a Market Maker) and the Exchange may determine that a higher 
margin requirement is necessary in light of the risks associated with a 
FLEX Equity Option position in excess of the standard limit for non-
FLEX Equity Options of the same class. The Exchange may, pursuant to 
its authority under Options 6C, Section 5, impose additional margin 
upon the account maintaining such under-hedged position as a safeguard 
against potential adverse effects of large FLEX Equity Option 
positions. The Exchange notes that the clearing firm carrying the 
account will be subject to capital charges under SEC Rule 15c3-1 to the 
extent of any margin deficiency resulting from a higher margin 
requirement imposed by the Exchange.
    Lastly, the Exchange notes that other exchanges currently trading 
FLEX options have similar position and exercise limits described 
above.\243\
---------------------------------------------------------------------------

    \243\ See Cboe Rules 8.35(d) and 8.42(g); and Phlx Options 8, 
Section 34(e) and (f).
---------------------------------------------------------------------------

R. Cash-Settled FLEX ETF Options
    Introducing cash-settled FLEX ETF Options will increase order flow 
to the Exchange, increase the variety of options products available for 
trading, and provide a valuable tool for investors to manage risk.
    The Exchange believes that the proposal to permit cash settlement 
as a contract term for options on the specified group of equity 
securities would remove impediments to and perfect the mechanism of a 
free and open market as cash-settled FLEX ETF Options would enable 
market participants to receive cash in lieu of shares of the underlying 
security, which would, in turn provide greater opportunities for market 
participants to manage risk through the use of a cash-settled product 
to the benefit of investors and the public interest. The Exchange does 
not believe that allowing cash settlement as a contract term for 
options on the specified group of equity securities would render the 
marketplace for equity options more susceptible to manipulative 
practices. As illustrated in the table above, each of the qualifying 
underlying securities is actively traded and highly liquid and thus 
would not be susceptible to manipulation because, over a six-month 
period, each security had an average daily notional value of at least 
$500 million and an ADV of at least 4,680,000 shares, which indicates 
that there is substantial liquidity present in the trading of these 
securities, and that there is significant depth and breadth of market 
participants providing liquidity and of investor interest. The Exchange 
believes the proposed bi-annual review to determine eligibility for an 
underlying ETF to have cash settlement as a contract term would remove 
impediments to and perfect the mechanism of a free and open market as 
it would permit the Exchange to select only those underlying ETFs that 
are actively traded and have robust liquidity as each qualifying ETF 
would be required to meet the average daily notional value and average 
daily volume requirements, as well as to select the same underlying 
ETFs on which other exchanges may list cash-settled FLEX ETF 
Options.\244\
---------------------------------------------------------------------------

    \244\ See supra notes 186 and 187.
---------------------------------------------------------------------------

    The Exchange believes the proposed change that, for FLEX ETF 
Options, at least one of exercise style, expiration date, and exercise 
price must differ from options in the non-FLEX market will provide 
clarity and eliminate confusion regarding permissible terms of FLEX ETF 
Options, including the proposed cash-settled FLEX ETF Options.
    The Exchange believes that the data provided by the Exchange 
supports the supposition that permitting cash settlement as a FLEX term 
for the 39 underlying ETFs that would currently qualify to have cash 
settlement as a contract term would broaden the base of investors that 
use FLEX Equity Options to manage their trading and investment risk, 
including investors that currently trade in the OTC market for 
customized options, where settlement restrictions do not apply.

[[Page 22321]]

    The Exchange believes that the proposal to permit cash settlement 
for certain FLEX ETF options would remove impediments to and perfect 
the mechanism of a free and open market because the proposed rule 
change would provide members and member organizations with enhanced 
methods to manage risk by receiving cash if they choose to do so 
instead of the underlying security. In addition, this proposal would 
promote just and equitable principles of trade and protect investors 
and the general public because cash settlement would provide investors 
with an additional tool to manage their risk. Further, the Exchange 
notes that another exchange has previously received approval that 
allows for the trading of cash-settled options, and, specifically, 
cash-settled FLEX ETF Options in an identical manner as the Exchange 
proposes to list them pursuant to this rule filing.\245\ The proposed 
rule change therefore should not raise issues for the Commission that 
it has not previously addressed.
---------------------------------------------------------------------------

    \245\ See supra notes 186 and 187.
---------------------------------------------------------------------------

    The proposed rule change to permit cash settlement as a contract 
term for options on up to 50 ETFs is designed to promote just and 
equitable principles of trade in that the availability of cash 
settlement as a contract term would give market participants an 
alternative to trading similar products in the OTC market. By trading a 
product in an exchange-traded environment (that is currently traded in 
the OTC market), the Exchange would be able to compete more effectively 
with the OTC market. The Exchange believes the proposed rule change is 
designed to prevent fraudulent and manipulative acts and practices in 
that it would lead to the migration of options currently trading in the 
OTC market to trading on the Exchange. Also, any migration to the 
Exchange from the OTC market would result in increased market 
transparency. Additionally, the Exchange believes the proposed rule 
change is designed to remove impediments to and to perfect the 
mechanism for a free and open market and a national market system, and, 
in general, to protect investors and the public interest in that it 
should create greater trading and hedging opportunities and 
flexibility. The proposed rule change should also result in enhanced 
efficiency in initiating and closing out positions and heightened 
contra-party creditworthiness due to the role of OCC as issuer and 
guarantor of the proposed cash-settled options. Further, the proposed 
rule change would result in increased competition by permitting the 
Exchange to offer products that are currently available for trading 
only in the OTC market and are approved to trade on another options 
exchange.
    The Exchange believes that establishing position limits for cash-
settled FLEX ETF Options to be the same as physically settled options 
on the same underlying security, and aggregating positions in cash-
settled FLEX ETF Options with physically settled options on the same 
underlying security for purposes of calculating position limits is 
reasonable and consistent with the Act. By establishing the same 
position limits for cash-settled FLEX ETF Options as for physically 
settled options on the same underlying security and, importantly, 
aggregating such positions, the Exchange believes that the position 
limit requirements for cash-settled FLEX ETF Options should help to 
ensure that the trading of cash-settled FLEX ETF Options would not 
increase the potential for manipulation or market disruption and could 
help to minimize such incentives. For the same reasons, the Exchange 
believes the proposed exercise limits are reasonable and consistent 
with the Act.
    Finally, the Exchange represents that it has an adequate 
surveillance program in place to detect manipulative trading in cash-
settled FLEX ETF Options and the underlying ETFs. Regarding the 
proposed cash settlement, the Exchange would use the same surveillance 
procedures currently utilized for the Exchange's other FLEX Options. 
For surveillance purposes, the Exchange would have access to 
information regarding trading activity in the pertinent underlying 
ETFs. The Exchange believes that limiting cash settlement to no more 
than 50 underlying ETFs (currently, 39 ETFs would be eligible to have 
cash-settlement as a contract term) would minimize the possibility of 
manipulation due to the robust liquidity in both the equities and 
options markets.
    As a self-regulatory organization, the Exchange recognizes the 
importance of surveillance, among other things, to detect and deter 
fraudulent and manipulative trading activity as well as other 
violations of Exchange rules and the federal securities laws. As 
discussed above, ISE has adequate surveillance procedures in place to 
monitor trading in cash-settled FLEX ETF Options and the underlying 
securities, including to detect manipulative trading activity in both 
the options and the underlying ETF.\246\ The Exchange further notes the 
liquidity and active markets in the underlying ETFs, and the high 
number of market participants in both the underlying ETFs and existing 
options on the ETFs, helps to minimize the possibility of manipulation. 
The Exchange further notes that under Section 19(g) of the Act, the 
Exchange, as a self-regulatory organization, is required to enforce 
compliance by its members and persons associated with its members with 
the Act, the rules and regulations thereunder, and the rules of the 
Exchange.\247\ The Exchange believes its surveillance, along with the 
liquidity criteria and position and exercise limits requirements, are 
reasonably designed to mitigate manipulation and market disruption 
concerns and will permit it to enforce compliance with the proposed 
rules and other Exchange rules in accordance with Section 19(g) of the 
Act. The Exchange performs ongoing evaluations of its surveillance 
program to ensure its continued effectiveness and will continue to 
review its surveillance procedures on an ongoing basis and make any 
necessary enhancements and/or modifications that may be needed for the 
cash settlement of FLEX ETF Options.
---------------------------------------------------------------------------

    \246\ Among other things, ISE's regulatory program include 
cross-market surveillance designed to identify manipulative and 
other improper trading, including spoofing, algorithm gaming, 
marking the close and open, as well as more general abusive behavior 
related to front running, wash sales, and quoting/routing, which may 
occur on the Exchange and other markets. Furthermore, the Exchange 
stated that it has access to information regarding trading activity 
in the pertinent underlying securities as a member of ISG.
    \247\ 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

    Additionally, the Exchange will monitor any effect additional 
options series listed under the proposed rule change will have on 
market fragmentation and the capacity of the Exchange's automated 
systems. The Exchange will take prompt action, including timely 
communication with the Commission and with other self-regulatory 
organizations responsible for oversight of trading in options, the 
underlying ETFs, and the ETFs' component securities, should any 
unanticipated adverse market effects develop.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intra-market competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as all Members 
who wish to trade FLEX

[[Page 22322]]

Options will be able to trade such options in the same manner. 
Additionally, positions in FLEX Options of all Members will be subject 
to the same position limits, and such positions will be aggregated in 
the same manner as described in proposed Section 18(c).
    The Exchange also does not believe that the proposed rule change 
will impose any burden on inter-market competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. As 
discussed above, other options exchanges currently offer electronic 
FLEX trading and cash-settled FLEX ETF Options on their respective 
markets. The Exchange believes that its proposal will allow ISE to 
compete with these other exchanges and provide an additional execution 
venue for these transactions for market participants. Thus, the 
Exchange believes that its proposal will promote inter-market 
competition by increasing the number of exchanges where electronic FLEX 
trading and cash-settled FLEX ETF Options will be available. The 
proposal also promotes inter-market competition by providing another 
alternative (i.e., exchange markets) to bilateral OTC trading of 
options with flexible terms. Exchange markets, in contrast with 
bilateral OTC trading, are centralized, transparent, and have the 
guarantee of OCC for options traded.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) by order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-ISE-2024-12 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-2024-12. 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 (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-ISE-2024-12 and should be 
submitted on or before April 19, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\248\
---------------------------------------------------------------------------

    \248\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-06452 Filed 3-28-24; 8:45 am]
BILLING CODE 8011-01-P