Notice2023-18304
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 3, Section 15 (Simple Order Risk Protections) To Adopt an Active Quote Protection
Primary source
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Published
August 25, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 164 (Friday, August 25, 2023)</title>
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[Federal Register Volume 88, Number 164 (Friday, August 25, 2023)]
[Notices]
[Pages 58368-58373]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-18304]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98182; File No. SR-ISE-2023-18]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Options 3,
Section 15 (Simple Order Risk Protections) To Adopt an Active Quote
Protection
August 21, 2023.
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 August 11, 2023, 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Options 3, Section 15 (Risk
Protections) to adopt an active quote protection.
[[Page 58369]]
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/ise/rules">https://listingcenter.nasdaq.com/rulebook/ise/rules</a>, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to adopt an active risk
counter functionality called active quote protection (``Active Quote
Protection'') in Options 3, Section 15. The Exchange intends to
introduce the foregoing changes with its upcoming technology migration
to enhanced Nasdaq, Inc. (``Nasdaq'') functionality, and intends to
begin implementation prior to December 20, 2024.\3\ The Exchange will
announce the initial migration date and symbol rollout schedule to
Members in an Options Trader Alert at a later date.
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\3\ See Securities Exchange Act Release No. 97605 (May 26,
2023), 88 FR 36350 (June 2, 2023) (SR-ISE-2023-10) (delaying the
implementation of all ISE technology migration rule filings).
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The Exchange proposes to offer an optional active risk counter
functionality called Active Quote Protection, which will be available
to Market Makers as an alternative to existing passive risk counter
functionality described in Options 3, Section 15(a)(3)(B) (i.e.,
``Automated Quotation Adjustments'').\4\ The proposed Active Quote
Protection functionality will be similar to existing active risk
counter functionality on another options exchange, which currently
allows exchange users to actively decrement the risk counter by a
specified amount at any time, rather than waiting until a risk limit is
reached or the user otherwise sends a specific instruction to the
exchange to completely reset the counting program.\5\
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\4\ As described below, the Exchange will specifically define
this passive risk counter functionality as ``Rapid Fire'' within
this Rule.
\5\ See MEMX LLC (``MEMX'') Rule 21.16(b) (Active Risk Counter).
See also Securities Exchange Act Release No. 95445 (August 8, 2022),
87 FR 49894 (August 12, 2022) (SR-MEMX-2022-10). Similar to the
proposed Active Quote Protection, the active risk counter on MEMX is
voluntary and offers a way for users to proactively manage their
risk. The MEMX risk protection, however, allows the user to actively
manage all the risk limits specified in MEMX's rule (e.g., executed
contracts, notional value, etc.) whereas the Exchange's proposal
would allow Market Makers to actively manage executed contracts
only, as discussed later in this filing. In addition, the Exchange's
proposal will only apply to quotes whereas MEMX's functionality
applies to both orders and quotes.
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Today, the Exchange requires Market Makers to configure risk
exposure thresholds based on various metrics for each options class,
including percentage of executed quotes (``Percentage Threshold''),
total number of executed contracts (``Volume Threshold''), absolute
value of the difference between long and short positions (``Delta
Threshold''), and absolute value of the difference between contracts
bought and contracts sold (``Vega Threshold'') (collectively,
``Thresholds'').\6\ As set forth in Options 3, Section 15(a)(3)(B)(i),
the System tracks each Threshold with a corresponding risk counter over
a Market Maker-specified rolling time period not to exceed 30 seconds.
Furthermore, Section 15(a)(3)(B)(i) and (ii) describes that when a risk
counter exceeds the corresponding Threshold during the specified time
period, the System would automatically remove the Market Maker's quotes
in all series of the applicable options class (each, a ``Purge
Event''). As a result of a Purge Event, the corresponding risk counter
and Threshold would reset upon such removal. The Exchange also notes
that pursuant to Section 15(a)(3)(B)(iii) today, the Thresholds and
risk counters can be completely reset if the Market Maker specifically
requests the System to remove quotes in all series of an options class.
This risk protection is passive in that the risk counters wait to reset
until the expiry of a specified time period, a Purge Event, or when the
Market Maker otherwise sends a specific instruction to the Exchange to
remove quotes to completely reset the counters.
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\6\ The Thresholds are described in detail in Options 3, Section
15(a)(3)(B)(i)(a)-(d). If a Market Maker does not provide a
parameter for each Threshold, the Exchange will apply default
parameters announced to Members.
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The Exchange now proposes to introduce a new risk protection called
Active Quote Protection that would enable Market Makers to actively
manage their executed contract limit (``Contract Limit'') by sending an
electronic instruction to the Exchange to decrement their executed
contract limit counter (``Limit Counter'') by a specified amount at any
time, rather than waiting until the expiry of a defined time period,
when the risk limit is exceeded (like a Purge Event), or when the
Market Maker otherwise sends a specific instruction to purge quotes to
completely reset the risk counter. The Contract Limit, as set by the
Market Maker, would apply for the duration of the trading day. Once the
Market Maker's Limit Counter exceeds the Contract Limit set by the
Market Maker, the System would automatically remove quotes in all
series of the applicable options class submitted through the Exchange's
Specialized Quote Feed protocol,\7\ identical to how the quote removal
mechanism works for a Purge Event today.\8\ Today, Purge Events are
triggered under the existing Automated Quotation Adjustments on the
first execution that exceeds the applicable Threshold. Once an
execution occurs, the System checks all Thresholds to see if they have
been exceeded. If exceeded, the Market Maker's quote would be purged
pursuant to Options 3, Section 15(a)(3)(B)(iii). In order to remain
consistent with the firm quote obligations of a broker-dealer pursuant
to Rule 602 of Regulation NMS, any marketable orders or quotes that are
executable against a Market Maker's quotes that are received \9\ prior
to the time the applicable Threshold is triggered will be automatically
executed up to the size of the Market Maker's quote, regardless of
whether the execution would cause the Market Maker to exceed their pre-
set Percentage Threshold, Volume Threshold, Delta Threshold, or Vega
Threshold.\10\
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\7\ Specialized Quote Feed or ``SQF'' is an interface that only
Market Makers may use to submit quotes to the Exchange. See
Supplementary Material .03(c) to Options 3, Section 7.
\8\ See Options 3, Section 15(a)(3)(B)(ii) (renumbered as
Section 15(a)(3)(B)(iii) under this proposal, as noted below).
\9\ The time of receipt for an order or quote is the time such
message is processed by the Exchange's order book.
\10\ See current Options 3, Section 15(a)(3)(B)(ii)(b). The
Exchange will renumber this as Section 15(a)(3)(B)(iii)(b) and
clarify this provision in the manner described later in this filing.
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Under Active Quote Protection, the System would similarly handle
the Market Maker's quote in that the quote could be filled one
execution over the Contract Limit before the Market Maker's remaining
quotes are cancelled by the System in order to be consistent with the
firm quote obligations under Rule 602 of Regulation NMS. Specifically,
the Exchange notes that any marketable orders or quotes that are
executable against a Market Maker's
[[Page 58370]]
quotes that are received \11\ prior to the time the Contract Limit is
triggered will be automatically executed up to the size of the Market
Maker's quote, regardless of whether the execution would cause the
Market Maker to exceed the Contract Limit.\12\
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\11\ See supra note 9.
\12\ For both the current Automated Quotation Adjustments and
proposed Active Quote Protection, the System will execute marketable
interest up to the size of the Market Maker's quote, but cannot
guarantee interest will be fully executed, as is the case with any
execution in the Exchange's order book. There is always the
possibility that the Market Maker's quote size (and/or Market
Maker's quote plus other interest on the order book) may not be
sufficient volume to fill the incoming interest.
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Additionally, under Active Quote Protection, Market Makers will be
able to submit a request (i) to decrement their Limit Counter by a
specified number of contracts, or (ii) to fully decrement their Limit
Counter to zero.\13\ Market Makers that elect to use the proposed
Active Quote Protection on a badge \14\ will not be able to use the
existing Threshold risk protections described above on the same badge
(i.e., the active and passive risk counter functionality would be
mutually exclusive per badge) given that it would be unnecessarily
complex to implement from a technology standpoint. Market Makers may be
associated with multiple badges today, so if they want to use both risk
protections for their activity on the Exchange, they will be able to
set either the active or passive risk counter functionality on each
one.
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\13\ As discussed later in this filing, in order to re-enter the
System after their quotes are purged pursuant to the Active Quote
Protection, Market Makers will need to submit the same request to
fully decrement their Limit Counter to zero.
\14\ 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).
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To effectuate the foregoing changes, the Exchange proposes to set
forth the new risk protection in subparagraph (B)(ii) of Options 3,
Section 15(a)(3), as follows: \15\
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\15\ As a result, the Exchange will also renumber existing
subparagraphs (B)(ii)-(vi) as proposed subparagraphs (B)(iii)-(vii).
In lieu of Rapid Fire, a Market Maker may provide an executed
contract limit (``Contract Limit'') that, if exceeded, the System
will automatically remove the Market Maker's quotes in all series of
an options class submitted through SQF. The System will apply the
Contract Limit for the duration of the trading day. For each class
of options, the System will maintain an active limit counter that
will track the current number of contracts executed through the
Market Maker's quotes (``Limit Counter''). If the Limit Counter
exceeds the Contract Limit established by the Market Maker, the
System will automatically remove the Market Maker's quotes as
described in Section 15(a)(3)(B)(iii). Market Makers may submit a
request (i) to decrement their Limit Counter by a specified number
of contracts, or (ii) to fully decrement their Limit Counter to
zero, including to re-enter the System as described in Section
15(a)(3)(B)(v). For Market Makers that elect to utilize the Contract
Limit, the Percentage Threshold, Volume Threshold, Delta Threshold,
and Vega Threshold will not be available for use on the Market
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Maker's badge.
As described above, once the Limit Counter exceeds the Contract
Limit set by the Market Maker under the proposed Active Quote
Protection, the System would automatically remove quotes in the same
manner as currently specified for a Purge Event in proposed
subparagraph (B)(iii) of Options 3, Section 15(a)(3). Accordingly, the
Exchange proposes to add Active Quote Protection's Contract Limit
throughout this Rule. Specifically, proposed subparagraph (B)(iii) will
provide that the System will automatically remove quotes in all series
of an options class when the Percentage Threshold, Volume Threshold,
Delta Threshold, Vega Threshold, or Contract Limit has been exceeded.
The System will send a Purge Notification Message to the Market Maker
for all affected series when the above thresholds have been exceeded.
Proposed subparagraph (B)(iii)(a) will provide that the Percentage
Threshold, Volume Threshold, Delta Threshold, Vega Threshold, and
Contract Limit are considered independently of each other.
Further, as discussed above, any marketable orders or quotes that
are executable against a Market Maker's quotes that are received \16\
prior to the time the applicable Threshold or Contract Limit is
triggered will be automatically executed up to the size of the Market
Maker's quote, even if such execution would cause the Market Maker to
exceed any of their pre-set risk limits with respect to any of the
foregoing risk parameters. The Exchange notes that the current related
Rule in sub-paragraph (B)(ii)(b)(3) only mentions that quotes will
execute up to the Market Maker's size, and is silent on marketable
orders. In addition, the current Rule does not specify the time of
receipt of such marketable interest that is executable against the size
of the Market Maker's quote. As such, the Exchange proposes to add this
specificity in proposed sub-paragraph (B)(iii)(b)(3) to better describe
how the System operates today for Automated Quotation Adjustments and
how the System will operate for proposed Active Quote Protection. In
particular, sub-paragraph (B)(iii)(b)(3) will provide:
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\16\ See supra note 9.
The System will execute any marketable orders or quotes that are
executable against a Market Maker's quote and received prior to the
time the Percentage Threshold, Volume Threshold, Delta Threshold,
Vega Threshold, or Contract Limit is triggered up to the size of the
Market Maker's quote, even if such execution results in executions
in excess of the Market Maker's applicable Threshold or Contract
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Limit with respect to any parameter.
In addition, when the System removes quotes as a result of
exceeding the Contract Limit under Active Quote Protection, the
Exchange proposes to require the Market Maker to submit a request to
re-enter the System. This request will be the same type of message as
the request described in proposed subparagraph (B)(ii) where the Market
Maker must request to fully decrement their Limit Counter back to zero
in order to re-enter the System. This requirement will be added in
proposed subparagraph (B)(v) of Options 3, Section 15(a)(3), and will
be similar to how the existing quote purge mechanism works for the
Thresholds today, except the Market Maker needs to send a separate
message (i.e., a re-entry indicator) to re-enter the System when their
quotes are purged as a result of exceeding any of the existing
Thresholds.
Similar to how default parameters are currently applied for each of
the existing Thresholds described above, the Exchange proposes to apply
a default parameter for the Active Quote Protection Contract Limit
(which would be announced to Members) if the Market Maker opting to use
Active Quote Protection does not provide a Contract Limit at the
outset.\17\ Accordingly, proposed subparagraph (B)(vi) will provide
that if a Market Maker does not provide a parameter for each of the
automated quotation removal protections described in (B)(i)(a)-(d) and
(B)(ii) above, the Exchange will apply default parameters, which are
announced to Members.
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\17\ The Exchange will initially set the default Contract Limit
at 100 contracts.
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The Exchange also proposes that the new Active Quote Protection
would leverage the existing market-wide speed bump (``MWSB'')
functionality currently set forth in Options 3, Section 15(a)(3)(B)(vi)
(renumbered as Section 15(a)(3)(B)(vii) under this proposal). Today,
MWSB is a risk protection offered alongside the current Automated
Quotation Adjustments and triggers when, during a time period
established by the Market Maker, the total number of Purge Events
exceeds a market-wide parameter provided to the Exchange by
[[Page 58371]]
the Market Maker.\18\ When MWSB is triggered, the Exchange
automatically purges the Market Maker's quotes in all classes, and the
Market Maker must request re-entry to the System by contacting the
Exchange's Operations Department. Today, MWSB is meant to provide
Market Makers with protection from the risk of multiple executions
across multiple series of an option or across multiple options. This
risk protection recognizes that risk to Market Makers is not limited to
a single series in an option or even to all series in an option; Market
Makers that quote in multiple series of multiple options have
significant exposure, requiring them to offset or hedge their overall
positions. Market Makers are required to continuously quote in assigned
options, and quoting across many series in an option or multiple
options creates the possibility of executions that can create large,
unintended principal positions that could expose Market Makers to
unnecessary risk. MWSB is therefore intended to assist Market Makers in
managing their market risk by tracking the number of Purge Events
relative to the market-wide parameter set by the Market Maker. The
Exchange believes that tracking the number of Active Quote Protection
Purge Events for a Market Maker against its MWSB market-wide parameter
would be similarly useful for managing market risk.
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\18\ Market Makers may request the Exchange to set the market
wide parameter to apply to just Nasdaq ISE or across Nasdaq ISE and
Nasdaq GEMX. The Exchange notes that the MWSB rule currently refers
to Supplementary Material .04 to Options 3, Section 14, which will
be deleted as an obsolete reference, as described later in this
filing.
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To that end, the Exchange proposes to update MWSB to add purge
events under Active Quote Protection to the MWSB counter such that
Active Quote Protection purge events and Purge Events under the current
Automated Quotation Adjustments will be aggregated together as counting
toward the specified market-wide parameter. Accordingly, the Exchange
proposes to add references to the Active Quote Protection rule (i.e.,
proposed subparagraph (B)(ii) of Options 3, Section 15(a)(3))
throughout the MWSB rule in proposed subparagraph (B)(vii),
specifically:
In addition to the automated quotation removal protections
described in (B)(i)(a)-(d) and (B)(ii) above, a Market Maker must
provide a market wide parameter by which the Exchange will
automatically remove a Market Maker's quotes in all classes when,
during a time period established by the Market Maker, the total
number of quote removal events specified in (B)(i)(a)-(d) and
(B)(ii) above exceeds the market wide parameter provided to the
Exchange by the Market Maker. Market Makers may request the Exchange
to set the market wide parameter to apply to just Nasdaq ISE or
across Nasdaq ISE and Nasdaq GEMX. Market Makers must request the
Exchange enable re-entry by contacting the Exchange's Operations
Department.
The following example illustrates the proposed behavior of the
Active Quote Protection risk protection:
Market Maker AAPL
Contract Limit: 100.
<bullet> Market Maker trades a transaction for 10 contracts in
AAPL; Limit Counter goes from 0 to 10.
<bullet> Market Maker sends a request to decrement its Limit
Counter in AAPL for 10 contracts; Limit Counter goes from 10 to 0.
<bullet> Market Maker trades a transaction for 20 contracts in
AAPL; Limit Counter goes from 0 to 20.
<bullet> Market Maker trades a transaction for 50 contracts in
AAPL; Limit Counter goes from 20 to 70.
<bullet> Market Maker sends a request to decrement its Limit
Counter in AAPL for 20 contracts; Limit Counter goes from 70 to 50.
<bullet> Market Maker trades a transaction for 60 contracts in
AAPL; Limit Counter goes from 50 to 110 and all Market Maker quotes in
AAPL are automatically purged after the execution because the Limit
Counter exceeded the Market Maker's Contract Limit of 100 executed
contracts.
<bullet> At this point, the Market Maker must send a request to
fully decrement its Limit Counter in AAPL back to zero in order to
begin quoting again.
The following example illustrates how MWSB will work with the
proposed Active Quote Protection functionality:
<bullet> Assume Market Maker in AAPL and SPY has Automated
Quotation Adjustments set for AAPL and Active QP set for SPY.
<bullet> Market Maker sets its MWSB market-wide parameter so that
it is triggered at 25 purge events within a 20 second time period.
<bullet> On a given trading day, if an Active Quote Protection
Purge Event is triggered 15 times in SPY and an Automated Quotation
Adjustment Purge Event is triggered 10 times in AAPL, all within 20
seconds, then the Exchange will automatically remove all of the Market
Maker's quotes AAPL and SPY.
Technical Amendments
The Exchange proposes a few technical, non-substantive amendments
in Options 3, Section 15(a)(3)(B). With the addition of the new Active
Quote Protection rule in proposed subparagraph (B)(ii), the Exchange
proposes to renumber existing subparagraphs (B)(ii)-(vi) as proposed
subparagraphs (B)(iii)-(vii) and make related changes to update
existing cross-cites within Section 15(a)(3)(B). The Exchange also
proposes to title subparagraph (B)(i) as ``Rapid Fire'' and
subparagraph (B)(vii) as ``Market-Wide Speed Bump'' to more clearly
identify which rules apply to which risk protections.
Lastly, the Exchange proposes in the MWSB rule (i.e., proposed
Options 3, Section 15(a)(3)(B)(vii)) to delete the reference to
Supplementary Material .04 to Options 3, Section 14. When the Exchange
originally adopted the MWSB rule, the intent was for the MWSB risk
protection to cover curtailment events under Supplementary Material .04
to Rule 722.\19\ Supplementary Material .04 to Rule 722 previously
governed Automated Spread Quotation Adjustments for complex quotes. The
Exchange subsequently removed complex quoting and all related
functionality (including Automated Spread Quotation Adjustments), but
did not remove the cross-cite to Supplementary Material .04 to Rule 722
in the MWSB rule.\20\ As a result, this cross-cite was ported over to
the Exchange's relocated Rulebook in 2019 and updated to Supplementary
Material .04 to Options 3, Section 14,\21\ when it should have been
deleted as an obsolete reference at the time the Exchange removed
complex quoting functionality.\22\ The Exchange now proposes to
eliminate this cross-cite in the MWSB rule as an obsolete reference.
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\19\ See Securities Exchange Act Release No. 71446 (January 30,
2014), 79 FR 6951 (February 5, 2014) (SR-ISE-2014-04). The MWSB rule
was originally set forth in Rule 804, relocated to Rule 714, and
finally relocated to its current place in Options 3, Section 15. See
Securities Exchange Act Release Nos. 84237 (September 20, 2018), 83
FR 48660 (September 26, 2018) (SR-ISE-2018-80); and 86138 (June 18,
2019), 84 FR 29567 (June 24, 2019) (SR-ISE-2019-17).
\20\ See Securities Exchange Act Release No. 85308 (March 13,
2019), 84 FR 10136 (March 19, 2019) (SR-ISE-2019-05).
\21\ See Securities Exchange Act Release No. 86138 (June 18,
2019), 84 FR 29567 (June 24, 2019) (SR-ISE-2019-17).
\22\ See supra note 20.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) of the Act,\23\ in general, and furthers the objectives of section
6(b)(5) of the Act,\24\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and
[[Page 58372]]
open market and a national market system, and, in general to protect
investors and the public interest.
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\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed Active Quote Protection
risk protection is consistent with the Act because it will enhance the
risk protection tools available to Market Makers by introducing a new
method of establishing and monitoring for risk parameters that will be
offered as an alternative to existing Rapid Fire risk parameters,
thereby supporting a Market Maker's ability to manage their risk on the
Exchange, and also providing them with flexibility to use additional
tools to manage risk. As noted above, while the passive (Rapid Fire)
and active (Active QP) risk counter functionality will be mutually
exclusive on each badge, Market Makers will still be able to use both
to cover their activity on the Exchange by getting multiple badges and
setting each risk counter by badge. The Exchange believes that offering
more risk management tools to Market Makers would mitigate their
exposure to excessive risk. The Exchange further believes that having
the new Active Quote Protection functionality leverage the existing
MWSB functionality will similarly support a Market Maker's ability to
manage their risk on the Exchange by including Active Quote Protection
purge events to the MWSB counter. As noted above, the risk to Market
Makers is not limited to a single series in an option or even multiple
series in an option as Market Makers that quote in multiple series of
multiple options have significant exposure, requiring them to offset or
hedge their overall positions. Market Makers are required to
continuously quote in assigned options, and quoting across many series
in an option or multiple options creates the possibility of executions
that can create large, unintended principal positions that could expose
Market Makers to unnecessary risk. Today, MWSB is designed to assist
Market Makers in managing their market risk by tracking the number of
Purge Events relative to the market-wide parameter set by the Market
Maker. The Exchange therefore believes that tracking the number of
Active Quote Protection purge events for a Market Maker against its
MWSB market-wide parameter would be similarly useful for managing
market risk so that they can provide deep and liquid markets to the
benefit of all investors. Ultimately, the Exchange believes that
providing Market Makers with additional tools in the manner described
above to manage their risk parameters serves to perfect the mechanism
of a free and open market and a national market system, and, in general
to protect investors and the public interest because Market Makers will
be better able to manage risks with these tools.
With regard to the impact of this proposal on system capacity, the
Exchange notes that it has analyzed its capacity and represents that it
and the Options Price Reporting Authority have the necessary systems
capacity to handle any potential additional traffic associated with the
proposed rule change. The Exchange believes that its members will not
have a capacity issue as a result of this proposal.
The Exchange further represents that its proposal will continue to
operate consistently with the firm quote obligations of a broker-dealer
pursuant to Rule 602 of Regulation NMS. Specifically, any marketable
interest that is executable against a Market Maker's quotes that are
received \25\ by the Exchange prior to the time this functionality is
triggered will be automatically executed at the price up to the Market
Maker's size, regardless of whether such execution results in
executions in excess of the Market Maker's pre-set Contract Limit.\26\
As discussed above, this is also in line with how current Rapid Fire
operates today. The Exchange believes that the proposed changes in
proposed sub-paragraph (B)(iii)(b) to specify that this Rule will apply
to marketable orders and quotes (currently silent on marketable
orders), and to specify the time of receipt of such marketable interest
that is executable against the size of the Market Maker's quote, will
promote clarity in how the System currently operates for Rapid Fire and
will operate for Active Quote Protection.
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\25\ See supra note 9.
\26\ See proposed subparagraph (B)(iii)(b) of Options 3, Section
15(a)(3).
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As noted above, the proposed Active Quote Protection functionality
is similar to existing active risk counter functionality on another
options exchange, which currently allows users to actively decrement
the risk counter by a specified amount at any time, rather than waiting
until a risk limit is reached or the user otherwise sends a specific
instruction to the exchange to completely reset the counting
program.\27\
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\27\ See supra note 5.
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Technical Amendments
The Exchange believes that the technical amendments in Options 3,
Section 15(a)(3)(B) described above are consistent with the Act because
they will promote clarity in the rules and make the Rulebook easier to
navigate for market participants by updating rule numbering and
existing cross-cites as described above. Furthermore, the Exchange also
believes that adding the defined terms for Rapid Fire and MWSB in the
rule text will promote clarity so that Members can more easily locate
the relevant functionalities in the Rulebook. Lastly, the Exchange
believes that the proposed changes to remove the cross-cite to
Supplementary Material .04 to Options 3, Section 14 from the MWSB rule
is consistent with the Act because it will eliminate an obsolete
reference to functionality that no longer exists on the Exchange, which
will promote clarity in the Rulebook and avoid any potential confusion.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
The Exchange does not believe that the proposed Active Quote
Protection functionality will impose any undue burden on intra-market
competition as it is aimed at mitigating exposure to excessive risk
when trading on the Exchange. While the Exchange will offer the
proposed functionality to Market Makers only, the proposed risk
protection is intended to provide Market Makers with an additional tool
to manage their risk parameters in a manner they deem appropriate. As
such, the Exchange believes that the proposed functionality may
facilitate Market Makers' provision of liquidity on the Exchange,
thereby benefitting all market participants through additional
execution opportunities at potentially improved prices.
The Exchange also believes that its Active Quote Protection
proposal does not impose an undue burden on inter-market competition as
the proposed risk protection is similar to an existing risk protection
on MEMX \28\ as described above, and any options market could adopt
similar rules.
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\28\ See supra note 5.
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Lastly, the Exchange does not believe that the proposed technical
amendments in Options 3, Section 15(a)(3)(B) will impose an undue
burden on competition as these are non-substantive changes to promote
clarity in the rules and make the Rulebook easier to navigate for
market participants.
[[Page 58373]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to section 19(b)(3)(A)(iii) of the Act \29\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\30\
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\29\ 15 U.S.C. 78s(b)(3)(A)(iii).
\30\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#a9dbdcc5cc84cac6c4c4ccc7dddae9daccca87cec6df"><span class="__cf_email__" data-cfemail="4f3d3a232a622c2022222a213b3c0f3c2a2c61282039">[email protected]</span></a>. Please include
file number SR-ISE-2023-18 on the subject line.
Paper Comments
<bullet> 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-2023-18. 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 (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). 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-2023-18 and should be
submitted on or before September 15, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-18304 Filed 8-24-23; 8:45 am]
BILLING CODE 8011-01-P
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