Notice2024-27992
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rules To List and Trade FLEX Options
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 29, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 230 (Friday, November 29, 2024)</title>
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[Federal Register Volume 89, Number 230 (Friday, November 29, 2024)]
[Notices]
[Pages 94986-95032]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27992]
[[Page 94985]]
Vol. 89
Friday,
No. 230
November 29, 2024
Part IV
Securities and Exchange Commission
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Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of
Amendment No. 1 and Order Granting Accelerated Approval of a Proposed
Rule Change, as Modified by Amendment No. 1, To Adopt Rules To List and
Trade FLEX Options; Notice
Federal Register / Vol. 89 , No. 230 / Friday, November 29, 2024 /
Notices
[[Page 94986]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101720; File No. SR-ISE-2024-12]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rules To
List and Trade FLEX Options
November 22, 2024.
On March 11, 2024, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
adopt new Options 3A that will govern the listing and trading of
Flexible Exchange Options (``FLEX Options'') on the Exchange's
electronic market. The proposed rule change was published for comment
in the Federal Register on March 29, 2024.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 99825, 89 FR 22294
(March 29, 2024) (``Notice''). Comments on the proposed rule change
can be found at: <a href="https://www.sec.gov/comments/sr-ise-2024-12/srise202412.htm">https://www.sec.gov/comments/sr-ise-2024-12/srise202412.htm</a>.
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On May 9, 2024, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On June 26, 2024, the Commission instituted
proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act \6\ to
determine whether to approve or disapprove the proposed rule change.\7\
On September 20, 2024, the Commission designated a longer period for
Commission action on the proposed rule change.\8\ On November 20, 2024,
the Exchange submitted Amendment No. 1 to the proposed rule change,
which replaced and superseded the proposed rule change as originally
filed.\9\ The Commission is publishing this notice to solicit comments
on Amendment No. 1 from interested persons, and is approving the
proposed rule change, as modified by Amendment No. 1, on an accelerated
basis.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 100086, 89 FR 42528
(May 15, 2024). The Commission designated June 27, 2024, as the date
by which the Commission shall approve or disapprove, or institute
proceedings to determine whether to approve or disapprove, the
proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 100438, 89 FR 54886
(July 2, 2024) (Notice of Order Instituting Proceedings) (``OIP'').
\8\ See Securities Exchange Act Release No. 101116 (September
20, 2024), 89 FR 78928 (September 26, 2024) (Extension No. 2). The
Commission designated November 24, 2024, as the date by which the
Commission shall approve or disapprove the proposed rule change.
\9\ On November 20, 2024, the Exchange submitted Amendment No. 1
to the proposed rule change. Amendment No. 1 is available on the
Commission's website at: <a href="https://www.sec.gov/comments/sr-ise-2024-12/srise202412-541455-1551502.pdf">https://www.sec.gov/comments/sr-ise-2024-12/srise202412-541455-1551502.pdf</a> (``Amendment No. 1'').
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I. Self-Regulatory Organization's Description of the Proposed Rule
Change, as Modified by Amendment No. 1 <SUP>10</SUP>
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\10\ This Section I and II reproduces Amendment No. 1, as filed
by the Exchange.
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The Exchange proposes to adopt rules that will govern the listing
and trading of flexible exchange options (``FLEX Options''). This
Amendment No. 1 supersedes the original filing in its entirety.
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 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. This Amendment No. 1 supersedes the original filing
in its entirety, and is being filed to better align the proposed rule
change with the rules of other exchanges and provide more clarity to
the proposed rule text as well as the description of and statutory
basis for the proposed rule change. As discussed in further detail
later in this filing, Amendment No. 1 makes a number of clarifying
changes to the proposed rule text as well as the following more
substantive rule text changes from the original filing: (i) excluding
the iShares Bitcoin Trust ETF from FLEX trading in proposed Options 3A,
Section 3(a); (ii) clarifying in proposed Options 3A, Section 3(b)(2)
that on the expiration date, a FLEX Order for the expiring FLEX Option
series may only be submitted to close out a position in such expiring
FLEX Option series; (iii) aligning the Exchange's closing only
provisions in proposed Options 3A, Section 3(d)(2) to already effective
rules of other options exchanges; (iv) clarifying in proposed Options
3A, Section 5 which provisions will govern how the minimum increments
for complex FLEX Orders (including complex FLEX Orders with a stock
component) will be handled; (v) clarifying in proposed Options 3A,
Sections 6(a) and 6(b) that only the specified order types, times-in-
force, and order and quote protocols are available for FLEX trading;
(vi) removing in proposed Options 3A, Section 7(b) the Exchange's
discretion to determine on a class-by-class basis which complex FLEX
Orders would not have to adhere to the ratio requirements for the
standard complex market; (vii) adding language in proposed Options 3A,
Section 11(a)(2)(A) to describe what would happen if there is a complex
FLEX Order and subsequently, a non-FLEX Option series is introduced for
the component leg(s), which would align to already effective rules of
another options exchange; (viii) adding language in proposed Options
3A, Sections 12(a)(2) and 13(a)(2) that each leg of a complex FLEX
Order must be in a permissible FLEX option series that complies with
proposed Options 3; (ix) specifying in proposed Options 3A, Section
13(a)(4) that the minimum size requirement will apply to each leg of a
complex FLEX Order; (x) adding in proposed Options 3A, Section 14(b)
that the Price Limit for Complex Order protections as applicable to the
stock component, the Stock-Tied NBBO protections, and the Stock-Tied
Reg SHO protections will also be available to FLEX Options as complex
order risk protections; and (xi) aligning the proposed position limits
for FLEX Index Options in proposed Options 3A, Section 18(a) with the
position limits for index options in the Exchange's standard index
options market.
The Exchange notes that Amendment No. 1 is solely intended to
further clarify the proposed rule text and conform the rule text with
the already
[[Page 94987]]
established rules of other exchanges, and to provide additional detail
and specificity with respect to the proposed rule change and additional
information in support of the purpose and statutory basis for the
proposed rule change.
Summary
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, which will be implemented as
a day 2 change after the first phase of the system migration was
implemented in September 2024.\11\ The Exchange intends to begin
implementation of the proposed rule change by May 12, 2025. The delayed
implementation of the proposed FLEX rules will ensure that the Exchange
will have the necessary functionality in place to trade FLEX. The
Exchange will issue a public notice to Exchange members (``Members'')
to provide notification of the FLEX implementation date and highlight
the features for FLEX proposed hereunder.
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\11\ The Exchange separately proposed a number of rule filings
in connection with this technology migration. See Securities
Exchange Act Release Nos. 94897 (May 12, 2022), 87 FR 30294 (May 18,
2022) (SR-ISE-2022-11); 96362 (November 18, 2022), 87 FR 72539
(November 25, 2022) (SR-ISE-2022-25); 96518 (December 16, 2022), 87
FR 78740 (December 22, 2022) (SR-ISE-2022-28); 96818 (February 6,
2023), 88 FR 8950 (February 10, 2023) (SR-ISE-2023-06); 97605 (May
26, 2023), 88 FR 36350 (June 2, 2023) (SR-ISE-2023-10); 98066
(August 7, 2023), 88 FR 54672 (August 11, 2023) (SR-ISE-2023-13);
98443 (September 20, 2023), 88 FR 66106 (September 26, 2023) (SR-
ISE-2023-19); and 98702 (October 6, 2023), 88 FR 71046 (October 13,
2023) (SR-ISE-2023-22). As per the previously announced technology
migration, ISE completed its symbol migration on September 23, 2024.
See <a href="https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2024-1">https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2024-1</a>. As a
result and prior to any FLEX trading on ISE, the foregoing rule
changes are currently all effective and operative.
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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:
<bullet> System Availability: The Exchange will not conduct an
Opening Process pursuant to Options 3, Section 8 in FLEX Options.\12\
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.\13\ Accordingly, the Exchange's simple and complex order books
will not be available for transactions in FLEX Options.\14\
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\12\ 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).
\13\ See proposed Options 3A, Section 11(a).
\14\ See proposed Options 3A, Section 10(a).
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<bullet> 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.\15\ As discussed further below, FLEX Options will not be
permitted with identical terms as an existing non-FLEX Option series
listed on the Exchange.\16\
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\15\ As discussed later in this filing, proposed Options 3A,
Section 3(c) will govern FLEX Options terms.
\16\ 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).
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<bullet> Priority: As discussed in detail below within the
respective sections for FLEX Auctions, FLEX PIM, and FLEX SOM, the
Exchange will apply the same priority order for FLEX Options as it
applies today in its standard non-FLEX market, particularly in its
standard auction mechanisms such as its standard Solicited Order
Mechanism and standard Price Improvement Mechanism. Specifically, the
System \17\ shall execute trading interest at the best price level
within the System before executing at the next best price. Priority
Customers shall have priority over non-Priority Customer interest at
the same price with time priority meaning that priority shall be
afforded to Priority Customer orders in the sequence in which they are
received by the System. As set out in Options 1, Section 1(a)(37), the
term ``Priority Customer'' means a person or entity that (i) is not a
broker or dealer in securities, and (ii) does not place more than 390
orders in listed options per day on average during a calendar month for
its own beneficial account(s).
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\17\ 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).
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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.\18\ 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.\19\ These FLEX Options were
offered as an alternative to an over-the-counter (``OTC'') market in
customized equity options.\20\ Several years after the initial
approval, the Commission approved the trading of additional FLEX
Options on specified equity securities.\21\ 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.'' \22\
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\18\ 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).
\19\ Id.
\20\ Id.
\21\ 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).
\22\ 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.
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The Exchange notes that FLEX Options are currently traded on Cboe,
NYSE American LLC (``NYSE American''), NYSE Arca, Inc. (``NYSE
[[Page 94988]]
Arca''), Nasdaq PHLX LLC (``Phlx''), and FLEX Equity Options on BOX
Exchange LLC (``BOX'').\23\ The Exchange further notes that Cboe offers
electronic and open outcry FLEX Options trading while NYSE American,
NYSE Arca, Phlx and BOX offer only open outcry trading of FLEX Options
on their respective trading floors.\24\ The Exchange now proposes to
allow for the trading of FLEX Options on its electronic market \25\ in
a substantially similar manner as Cboe's 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, 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. The Exchange also will
not incorporate the concept of a ``FLEX Official'' as this is a floor
concept and the Exchange does not have a trading floor. As such,
instead of nullifying FLEX Option transactions that do not conform to
the terms of the Exchange's proposed FLEX rules,\26\ the Exchange will
System enforce its proposed FLEX rules and reject at the outset a FLEX
Option transaction that does not conform to the terms of the proposed
FLEX rules. The very few instances where the Exchange will not System-
enforce the proposed FLEX rules and will instead apply its surveillance
patterns will be specifically noted below.
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\23\ 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, Phlx Options 8, Section
34, and BOX Rules 5055 and 7605. The Exchange also notes that BOX
recently received approval from the Commission to allow for the
trading of FLEX equity options on the BOX trading floor. See
Securities Exchange Act Release No. 100156 (May 15, 2024), 89 FR
44721 (May 21, 2024) (SR-BOX-2023-20).
\24\ See supra note 23.
\25\ The Exchange is not proposing to add open outcry FLEX
Options trading as it does not have a trading floor.
\26\ Cboe Rule 5.75(b) sets forth the responsibilities of FLEX
Officials, including the responsibility to nullify certain FLEX
Option transactions that do not conform to Cboe's FLEX rules, and to
call upon a FLEX Market-Maker with an appointment in a FLEX Option
class to respond to open outcry FLEX Auctions in that FLEX Option
class when no other ICMPs respond. The Exchange will not adopt these
provisions because a FLEX Official is a floor concept and Exchange
does not have a trading floor (and therefore no open outcry
auctions).
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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. The Exchange has conducted a thorough
review of its existing trading rules to ensure that the proposed Rules
in Options 3A accurately reflects the application of the Exchange's
non-FLEX Option trading rules to FLEX Options,\27\ as well as those
non-FLEX Option trading rules that would not apply to FLEX Options.\28\
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\27\ For example, Options 3, Section 1 (Hours of Business) will
apply to FLEX and non-FLEX Options, except the Exchange may
determine to narrow or otherwise restrict the trading hours for FLEX
Options. See proposed Options 3A, Section 2. As another example,
Options 3, Section 9 (Trading Halts) will apply to FLEX and non-FLEX
Options. The Exchange notes that pursuant to proposed Options 3A,
Section 9, it 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. Furthermore, the System
does not accept a FLEX Order for a FLEX Option series while trading
in a FLEX Option class is halted.
\28\ For example, the Exchange's simple and complex order books
will not be available for transactions in FLEX Options. See proposed
Options 3A, Section 10. In addition, FLEX Options may not trade via
the Block Order Mechanism (Options 3, Section 11(a)), simple and
complex Facilitation Mechanism (Options 3, Section 11(b) and (c)),
or as simple and complex Customer Cross Orders (Options 3, Section
12(a) and (b)), simple and complex Qualified Contingent Cross
(``QCC'') Orders (Options 3, Section 12(c) and (d)), and simple and
complex QCC with Stock Orders (Options 3, Section 12(e) and (f))).
If the Exchange intends to allow FLEX Options to trade via any of
the foregoing auction mechanisms or as any of the foregoing crossing
orders, the Exchange would be required to file a proposed rule
change with the Commission to amend its FLEX rules to allow for the
use of the foregoing trading functionality for FLEX Options.
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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.\29\ Therefore, the trading hours for FLEX Options will
generally be 9:30 a.m. to 4:00 p.m. Eastern time, except for certain
options products that trade until 4:15 p.m. Eastern time.\30\ This
would align the proposed trading hours for FLEX Options with the
current trading hours for corresponding non-FLEX Options.
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\29\ See Cboe Rule 5.1(b)(3)(A) for materially identical
provisions.
\30\ See Options 3, Section 1(c)-(e). These products are
currently options on Exchange-Traded Fund Shares (as defined in
Options 4, Section 3(h), options on Index-Linked Securities (as
defined in Options 4, Section 3(k)(1)), and options on certain
broad-based indexes, as designated by the Exchange.
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As it relates to the Exchange's proposed discretion relating to the
trading hours for FLEX Options, this is consistent with Cboe's FLEX
Options rules as noted above. The Exchange believes that given the
unique nature of FLEX, in contrast to the non-FLEX market, it is
reasonable to permit the Exchange, in its discretion, to narrow or
otherwise restrict the trading hours for FLEX Options, so long as such
trading hours occur within the normal options trading hours of the
Exchange described above. The Exchange would provide adequate advance
notification to its Members of such changes in FLEX trading hours.
[[Page 94989]]
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 (except the iShares
Bitcoin Trust ETF) 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,\31\ respectively, even if the
Exchange does not list that non-FLEX Option class for trading.\32\ The
Exchange proposes to exclude iShares Bitcoin Trust ETF (``IBIT'') from
being eligible for trading as a FLEX Option on ISE to be consistent
with the Commission's approval of IBIT options, which required the
position limit for IBIT options to be 25,000 contracts.\33\ As
discussed in the position limits section below, there will generally be
no position limits for FLEX Equity Options.\34\ The Exchange therefore
proposes to exclude IBIT options from being eligible to trade as a FLEX
Option (namely, a FLEX ETF option) to continue to limit the position
limits for IBIT options. For clarity, this exclusion will apply to both
physically-settled and cash-settled FLEX ETF options (as further
described in this filing), such that IBIT options will be excluded from
being eligible to trade as a physically-settled or a cash-settled FLEX
ETF option. If the Exchange determines to allow FLEX trading on IBIT
options at a later date, it will do so by submitting a 19b-4 rule
filing with the Commission.
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\31\ 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.
\32\ See Cboe Rule 4.20 for materially identical provisions.
\33\ See Securities Exchange Act Release No. 101128 (September
20, 2024), 89 FR 78942 (September 26, 2024) (SR-ISE-2024-03).
\34\ See proposed Options 3A, Section 18(b)(1)(A).
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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,\35\
subject to the following stipulations.\36\ 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.\37\ Second, a
FLEX Order for a FLEX Option series may be submitted on any trading day
prior to the expiration date.\38\ The Exchange also proposes to clarify
in proposed Section 3(b)(2) that on the expiration date, a FLEX Order
for the expiring FLEX Option series may only be submitted to close out
a position in such expiring FLEX Option series.\39\
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\35\ 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.
\36\ See proposed Options 3A, Section 3(b), which is based on
Cboe Rule 4.21(a).
\37\ See proposed Options 3A, Section 3(b)(1), which is based on
Cboe Rule 4.21(a)(1).
\38\ See proposed Options 3A, Section 3(b)(2), which is based on
Cboe Rule 4.21(a)(2). The Exchange notes that it will System enforce
which options are eligible to be submitted as FLEX Options. As such,
the System will reject at the outset a FLEX Option transaction that
does not conform to the terms of the FLEX rules.
\39\ The Exchange will System enforce this provision such that
it will reject an opening position in an expiring FLEX Option series
on the day of expiration.
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Third, in the event the relevant expiration is a holiday pursuant
to General 3 (which incorporates Nasdaq General 3, Rule 1030 by
reference),\40\ 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 an expiration date that is a business day immediately
following the holiday.\41\
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\40\ ISE General 3 incorporates by reference Series 1000 in
General 3 of the Rules of The Nasdaq Stock Market, LLC (``Nasdaq'')
(including Nasdaq Rule 1030).
\41\ See proposed Options 3A, Section 3(b)(3), which is based on
Cboe Rule 4.22(c).
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D. FLEX Options Terms (Section 3(c))
Proposed Section 3(c) will specify the terms that must be included
in a FLEX Order.\42\ Specifically, when submitting a 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,\43\ which terms constitute the FLEX Option
series.
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\42\ 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.
\43\ 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 243 and 244.
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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); \44\
(2) type of option (i.e., put or call); \45\ (3) exercise style, which
may be American-style or European-style; \46\ (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; \47\ (5) settlement type for the FLEX Equity
Option or FLEX Index Option, as applicable; \48\ and (6) exercise
[[Page 94990]]
price, which may be in increments no smaller than $0.01.\49\ Further,
the Exchange may determine the smallest increment for exercise prices
of FLEX Options on a class-by-class basis without going lower than
$0.01.\50\ The Exchange notes that the exercise price of the FLEX
Option would generally be dependent on the price of the underlying
security.
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\44\ 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.
\45\ 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.
\46\ 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.
\47\ 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.
\48\ 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.
\49\ 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.
\50\ 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. The
Exchange will also clarify that it would not go lower than $0.01
when determining the smallest increment for exercise prices of FLEX
Options to make clear that it would stay within the stated confines
of this Rule.
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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.\51\
Proposed subparagraph (c)(5)(A)(iii) will provide that FLEX Equity
Options are subject to the exercise by exception provisions of OCC Rule
805.
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\51\ 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.
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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'').\52\ 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).\53\
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\52\ 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.
\53\ The only broad-based index option that would be able to
list as a FLEX PM Third Friday Option is the Nasdaq-100 Index option
(``NDX'' or ``NDX options'') because the Exchange only received
approval to list a third-Friday-of-the-month p.m. expiration on NDX
options its standardized market. See Securities Exchange Act Release
No. 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 Options With a
Third-Friday-of-the-Month Expiration).
---------------------------------------------------------------------------
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.\54\ 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.\55\ The foregoing provisions are materially identical to Cboe
Rule 4.22(a)(1) and (2).
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\54\ 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.
\55\ This includes all priority and trade-through provisions on
the Exchange. See, e.g., Options 3, Section 10 and Options 5,
Section 2.
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Notwithstanding the above, if a non-FLEX Option series \56\ is
added intraday, for the balance of that trading day, a position
established under the FLEX trading procedures may be closed using the
FLEX trading procedures in this Options 3A against another closing only
FLEX position. No FLEX Orders may be submitted into an electronic
auction pursuant to Sections 11(b), 12, or 13 below for a FLEX Option
series with the same terms as the non-FLEX Option series, unless the
FLEX Order is a closing order, and it is the day on which the non-FLEX
Option series was added intraday. Members may only submit responses
that close out existing FLEX positions.\57\ In the event the non-FLEX
Option series is added on a trading day after the position is
established, the holder or writer of a FLEX Option position established
under the FLEX trading procedures would be permitted to close such
position as a non-FLEX transaction consistent with the requirements of
subsection (d)(1) of this rule.\58\ The Exchange will notify Members
when a FLEX Option series is restricted to closing only transactions.
The System will reject a transaction in such a restricted series that
does not conform to the requirements specified in proposed Options 3A,
Section 3(d).\59\
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\56\ Cboe Rule 4.22(b)(1) currently indicates that Cboe's
closing-only provisions apply if a non-FLEX Option American-style
series is added intraday. The Exchange, however, believes it is more
straightforward to apply the closing-only provisions to all non-FLEX
Option series (i.e., American-style and European-style FLEX Option
series) instead of limiting these provisions to one type of exercise
style. As such, the Exchange's proposed language in Options 3A,
Section 3(d)(2)(A) will instead provide that the Exchange's closing-
only provisions would apply ``if a non-FLEX Option is added
intraday.'' See BOX Rule 7605(d)(3), which similarly does not limit
BOX's closing-only provisions to American-style FLEX Options series.
\57\ See proposed Options 3A, Section 3(d)(2)(A), which is based
on Cboe Rule 4.22(b)(1) except the Exchange is not incorporating
Cboe's provisions for open outcry trading as the Exchange does not
offer open outcry trading today. The Exchange is also adding cross-
cites to its electronic FLEX SOM and FLEX PIM auctions in proposed
Options 3A, Sections 12 and 13 because the closing only provisions
in proposed Options 3A, Section 3(d)(2) will also apply to those
electronic FLEX auctions. Lastly, the Exchange notes that unlike
Cboe, it is not proposing to add FLEX Index Options with a
multiplier of 1 (i.e., Micro FLEX Index Options) and will therefore
not incorporate Cboe's closing only language with respect to Micro
FLEX Index Options in Rule 4.22(b)(2).
\58\ See proposed Options 3A, Section 3(d)(2)(B), which is
materially identical to BOX Rule 5055(f)(3). The Exchange is adding
this language to clarify how it would handle open FLEX positions if
an identical non-FLEX Option series is added on the day after.
\59\ See proposed Options 3A, Section 3(d)(2), which is based on
Cboe Rule 4.22(b), except the Exchange is replacing the concept of
``FLEX Official'' from Cboe's rule to ``the System'' as a FLEX
Official is a floor concept. As such, the Exchange will System
enforce the rejection of FLEX Options that are fully fungible with a
non-FLEX Option instead of following Cboe, which specifies that a
FLEX Official could nullify such a transaction on Cboe.
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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
[[Page 94991]]
FLEX Options must be expressed in U.S. dollars and decimals in the
minimum increments as set forth in proposed Section 5.\60\ 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 for the options leg of a
FLEX Option.\61\ Proposed Section 5(b) will provide that for the stock
leg of a FLEX Option, the minimum increments are set forth in Options
3A, Section 11(b)(1)(G), Section 12(a)(5), and Section 13(a)(5). As
discussed later in this filing, the foregoing rules specify how minimum
increments for complex FLEX Orders (including complex FLEX Orders with
a stock component) would be handled. The Exchange is adding these cross
cites in the minimum increments rule in proposed Options 3A, Section
5(b) for transparency and clarity.
---------------------------------------------------------------------------
\60\ 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.
\61\ 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. The Exchange is also clarifying that this
provision would apply to the options leg of a FLEX Option.
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G. Types of Orders; Order and Quote Protocols (Section 6)
Pursuant to proposed Section 6(a), the Exchange may determine to
make only the Limit Order and Cancel and Replace Order order types \62\
and Immediate or Cancel times-in-force,\63\ respectively, in Options 3,
Section 7 available on a class or System basis for FLEX Orders.\64\ The
Exchange notes that it currently has the authority to make certain
order types and TIFs 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.
---------------------------------------------------------------------------
\62\ See Options 3, Sections 7(b) and 7(f) for a description of
Limit Orders and Cancel and Replace Orders, respectively. All of the
other order types listed in Options 3, Section 7 (such as Customer
Cross Orders, Qualified Contingent Cross Orders, QCC with Stock
Orders, Block Orders, and Facilitation Orders) do not apply to FLEX.
\63\ See Supplementary Material .02(d) to Options 3, Section 7
for a description of Immediate-or-Cancel. All of the other TIFs in
Supplementary Material .02 to Options 3, Section 7 will not apply to
FLEX.
\64\ See Options 3, Section 7 for descriptions of these order
types and times-in-force.
---------------------------------------------------------------------------
Proposed Section 6(b) will provide that only 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: \65\
---------------------------------------------------------------------------
\65\ Notes 58-60 below describe what features are available on
these protocols today for non-FLEX Options. The Exchange is
proposing to specify that some of these features (i.e., sending/
receiving FLEX Orders, FLEX notifications and FLEX responses) will
be available for FLEX Options through the specified protocols as
described above. While other basic features will be available for
FLEX Options (for example, the options symbol directory will be
available for FLEX Options), the Exchange is proposing to specify
the particular features in proposed Options 3A, Section 6(b) to
highlight the most important features that would be available
through these protocols for FLEX trading.
---------------------------------------------------------------------------
<bullet> FIX: \66\ FLEX Orders and FLEX auction responses
---------------------------------------------------------------------------
\66\ ``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.
See Supplementary Material .03(a) to Options 3, Section 7.
---------------------------------------------------------------------------
<bullet> OTTO: \67\ FLEX Orders, FLEX auction notifications, and
FLEX auction responses
---------------------------------------------------------------------------
\67\ ``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. See Supplementary Material .03(b) to Options 3,
Section 7.
---------------------------------------------------------------------------
<bullet> SQF: \68\ FLEX auction notifications and FLEX auction
responses
---------------------------------------------------------------------------
\68\ ``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. See Supplementary Material .03(c) to Options 3,
Section 7.
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H. Complex Orders (Section 7)
Pursuant to proposed Section 7(a), the Exchange may make complex
orders, including a Complex Options Order,\69\ Stock-Options Order,\70\
and Stock-Complex Order \71\ available for FLEX trading. Complex FLEX
Orders may have up to the maximum number of legs determined by the
Exchange.\72\ 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).\73\ The
Exchange notes that a non-FLEX complex order can have both am-settled
and p.m.-settled legs today. The Exchange received approval to permit
the listing and trading of p.m.-settled NDX options pursuant to
Supplementary Material .07 to Options 4A, Section 12.\74\ Specifically,
the Exchange is permitted to list p.m.-settled NDX options that expire
(1) on any Monday, Tuesday, Wednesday, Thursday, or Friday (other than
the third Friday-of-the-month or days that coincide with an end-of-
month expiration) \75\ or (2) on the last day of the
[[Page 94992]]
trading month.\76\ In addition, NDX options are also currently allowed
to be listed as a.m.-settled with a standard expiration (i.e., the
third-Friday-of-the-month).\77\ Therefore, ISE may currently list NDX
options that are both a.m.-settled and p.m.-settled for its non-FLEX
market. As such, the Exchange's FLEX proposal for complex orders in
this respect will not only align with Cboe's current FLEX complex order
functionality as noted above,\78\ but will also align with its own
current non-FLEX complex order functionality.
---------------------------------------------------------------------------
\69\ 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).
\70\ 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).
\71\ 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).
\72\ The Exchange will initially permit a maximum of 10 legs.
\73\ 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).
\74\ See Securities Exchange Act Release No. 98450(September 20,
2023), 88 FR 66111 (September 26, 2023) (SR-ISE-2023-08) (Order
Granting Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, To Make Permanent Certain P.M.-Settled Pilots).
\75\ See Supplementary Material .07(a) to Options 4A, Section
12.
\76\ See Supplementary Material .07(b) to Options 4A, Section
12.
\77\ See Options 4A, Section 12(a)(5).
\78\ See supra note 73.
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Pursuant to proposed Section 7(b), complex FLEX Orders will not
have to adhere to the ratio requirements in Options 3, Sections
14(a)(1)-(3). Options 3, Sections 14(a)(1)-(3) currently includes the
complex ratio requirements for Complex Options Strategies, Stock-
Options Strategies, and Stock-Complex Strategies.\79\ 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.\80\ The Exchange notes that Cboe currently
permits complex FLEX Orders to be submitted with any ratio.\81\
---------------------------------------------------------------------------
\79\ See supra notes 69-71.
\80\ 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.
\81\ See Cboe US Options Complex Book Process, Section 2.1
(Ratios) and Section 3 (Complex FLEX Order Functionality), available
at <a href="https://cdn.cboe.com/resources/membership/US-Options-Complex-Book-Process.pdf">https://cdn.cboe.com/resources/membership/US-Options-Complex-Book-Process.pdf</a>. For its non-FLEX market, 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.
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I. Opening of FLEX Trading (Section 8)
Proposed Section 8(a) will specify that there will be no Opening
Process \82\ pursuant to Options 3, Section 8 in FLEX Options. Instead,
as specified in proposed Section 8(b), 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.\83\ The Exchange will also make clear in proposed
Section 8(b) that for FLEX Index Options, the term ``underlying
security'' will have the same meaning as defined in Options 4A, Section
2(q).\84\
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\82\ As described in Options 3, Section 8(c)(i), ISE's ``Opening
Process'' for an option series is conducted pursuant to Options 3,
Section 8 paragraphs (f)-(j), on or after 9:30 a.m. Eastern Time if
the Away Best Bid or Offer, if any, is not crossed and the System
has received, within two minutes of the opening trade or quote on
the market for the underlying security, a Valid Width Quote. The
System will accept a Primary Market Maker's Valid Width Quote or the
Valid Width Quote of at least one Competitive Market Maker. The term
``Away Best Bid or Offer'' or ``ABBO'' means the displayed National
Best Bid or Offer not including the Exchange's Best Bid or Offer.
See Options 1, Section 1(a)(4).
\83\ 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.
\84\ Options 4A, Section 2(q) states that the term ``underlying
security'' or ``underlying securities'' with respect to an index
options contract means any of the securities that are the basis for
the calculation of the index.
---------------------------------------------------------------------------
Because market participants incorporate transaction prices of
underlying securities or the values of underlying indexes when pricing
options (including FLEX 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).
Additionally, the Exchange's Opening Process is used to open or
reopen a series of options on ISE at a single opening price.\85\ 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.\86\ 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.\87\ 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.
---------------------------------------------------------------------------
\85\ See Options 3, Section 8(h) and (j).
\86\ See Options 3, Section 8(c).
\87\ 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.\88\
---------------------------------------------------------------------------
\88\ See Cboe Rule 4.21(a)(3) for materially identical
provisions.
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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.\89\
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\89\ 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).
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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.\90\
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\90\ 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.
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Proposed Section 11(a)(1) and (2) will specify the requirements for
both simple and complex FLEX Orders.
<bullet> 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
[[Page 94993]]
above, size, side of the market, and a bid or offer price.\91\ 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.
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\91\ 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.
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<bullet> 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.\92\ 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.\93\ The Exchange
also proposes to add similar language as BOX to describe what would
happen if there is a complex FLEX Order and subsequently, a non-FLEX
Option series is introduced for the component leg(s). Specifically,
proposed Section 11(a)(2)(A)(i) and (ii) will provide that if a non-
FLEX Option series is added intra-day for a component leg(s) of a
complex FLEX Order, the holder or writer of a FLEX Option position in
the component leg(s) resulting from such complex FLEX Order would be
permitted to close its position(s) under the FLEX trading procedures
against another closing only FLEX Option position for the balance of
the trading day on which the non-FLEX Option series is added. If a non-
FLEX Option series is added for a component leg(s) of a complex FLEX
Order on a trading day after the complex FLEX Order position is
established, the holder or writer of a FLEX Option position in the
component leg(s) resulting from such complex FLEX Order would be
required to execute separate FLEX Option and non-FLEX Option
transactions to close its position(s), such that FLEX Option component
leg(s) would trade under the FLEX trading procedures and non-FLEX
Option component leg(s) would trade subject to the non-FLEX trading
procedures and rules.\94\ 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 when combined must equal the net price of the complex
FLEX Order.\95\
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\92\ 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 91.
\93\ See proposed Options 3A, Section 11(a)(2)(A).
\94\ See proposed Options 3A, Section 11(a)(2)(A)(i) and (ii),
which is materially identical to BOX Rule 7605(d).
\95\ See proposed Options 3A, Section 11(a)(2)(B), 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.
The Exchange will also clarify in its proposed rule that the leg
prices when combined must equal the net price of the complex FLEX
Order (additions emphasized). Cboe's rule currently states that the
leg prices ``must add together to equal'' the net price. However,
the Exchange notes that sell legs of a complex order are subtracted,
and therefore proposes the language in Options 3A, Section
11(a)(2)(B) (instead of copying Cboe Rule 5.72(b)(2)(A)) for greater
accuracy.
---------------------------------------------------------------------------
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.\96\
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).\97\
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\96\ 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).
\97\ 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.
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<bullet> Class: The FLEX Order is in a class of options the
Exchange is authorized to list for trading on the Exchange.
<bullet> Size: There is no minimum size for FLEX Orders.
<bullet> Terms: A simple or complex FLEX Order must comply with
proposed Section 11(a).
<bullet> Price: The bid or offer price, or the net debit or credit
price, as applicable, of the FLEX Order is the ``auction price.''
<bullet> 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.
<bullet> Exposure Interval: The submitting Member must designate
the length of the ``exposure interval,'' which must be between three
seconds and five minutes.\98\ If the designated time 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).\99\
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\98\ 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.
\99\ 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
(instead of cancelling the FLEX Order) and also prevent executions
that occur after the market close.
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<bullet> 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.\100\ 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
[[Page 94994]]
be expressed in one cent ($0.01) increments, and the options leg of
Complex Options Strategies may be executed in no smaller than 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,\101\ 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 no smaller than 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.
---------------------------------------------------------------------------
\100\ 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).
\101\ The minimum increment for individual options leg of a FLEX
Order may not be smaller than $0.01, as required under proposed
Options 3A, Section 5. However, when a stock leg is included in a
complex strategy (i.e., Stock-Option Strategy or Stock-Complex
Strategy) for the FLEX Option, then the price for FLEX Stock-Option
Strategies and FLEX Stock-Complex Strategies can be expressed to
four decimal places in order to trade at finer decimal increments
permitted by the equity market. However, the options leg will not be
permitted to execute in increments smaller than one cent ($0.01).
This is identical to how a non-FLEX Stock-Option Strategy and a non-
FLEX Stock-Complex Strategy can be priced today. See Options 3,
Section 14(c)(1) for identical provisions. See also Securities
Exchange Act Release No. 84373 (October 5, 2018), 83 FR 51730 at
51732 (October 12, 2018) (SR-ISE-2018-56).
---------------------------------------------------------------------------
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,\102\ capacity, and exposure
interval. Similar to all other auction notifications, FLEX Auction
notification messages are not disseminated to OPRA.\103\ 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.
---------------------------------------------------------------------------
\102\ 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.
\103\ 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.\104\ 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.
---------------------------------------------------------------------------
\104\ 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.\105\ 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.\106\ If there are concurrent FLEX
Auctions occurring, a Member may submit responses to all ongoing
auctions, and thus concurrent auctions will not hinder a Member's
ability to participate in any FLEX Auction.
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\105\ See Cboe Rule 5.72(c)(2)(C) for materially identical
provisions. The Exchange notes that submitting Members may cancel
but not modify a FLEX Auction prior to the end of the exposure
interval.
\106\ See Cboe Rule 5.72(c)(2)(D) for materially identical
provisions.
---------------------------------------------------------------------------
A Member using the same badge/ \107\ mnemonic \108\ may only submit
a single FLEX response per auction ID to a FLEX Auction.\109\ 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.\110\ 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).\111\
[[Page 94995]]
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.
---------------------------------------------------------------------------
\107\ 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).
\108\ 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).
\109\ A badge and mnemonic are essentially Member identifiers.
Every order that comes into the System is tied to a badge or
mnemonic.
\110\ In other words, the Member does not have to cancel the
previous FLEX response before submitting an additional one as the
previous response is automatically replaced. 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.
\111\ 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 110.
---------------------------------------------------------------------------
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.\112\ FLEX responses are not visible to
Members or disseminated to OPRA.\113\ 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.\114\
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.\115\
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\112\ See proposed Options 3A, Section 11(b)(2)(D)(iii), which
is based on Cboe Rule 5.72(c)(2)(D)(iii).
\113\ See proposed Options 3A, Section 11(b)(2)(D)(iv), which is
based on Cboe Rule 5.72(c)(2)(D)(iv).
\114\ See Supplementary Material .02 to Options 3, Section 11;
and Options 3, Section 13(c)(4).
\115\ 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.\116\ 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.\117\
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\116\ See proposed Options 3A, Section 11(b)(2)(D)(v), which is
based on Cboe Rule 5.72(c)(2)(D)(v).
\117\ 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 underlying or the submitting
Member cancels the FLEX Auction before the end of the exposure
interval, in which case the FLEX Auction concludes without
execution.\118\ At the conclusion of the FLEX Auction:
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\118\ See Cboe Rule 5.72(c)(3) for similar provisions, except
the Exchange is making minor modifications to replace ``affected
series'' with ``affected underlying'' and to specify that the
submitting Member has to cancel the FLEX Auction before the end of
the exposure period. The foregoing changes are merely clarifications
to better articulate the functionality.
---------------------------------------------------------------------------
<bullet> 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.\119\
---------------------------------------------------------------------------
\119\ 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.
---------------------------------------------------------------------------
<bullet> 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 \120\ with Priority Customer \121\ overlay \122\ (as
described in Options 3, Section 10(c)(1)(A)). 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 SOM and PIM for
non-FLEX Options where the Priority Customer gets priority treatment
over non-Priority Customers.\123\
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\120\ 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).
\121\ The term ``Priority Customer'' means a person or entity
that (i) is not a broker or dealer in securities, and (ii) does not
place more than 390 orders in listed options per day on average
during a calendar month for its own beneficial account(s). See
Options 1, Section 1(a)(37).
\122\ 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).
\123\ See, e.g., Options 3, Section 11(d)(3)(C) (SOM allocation
methodology) and Options 3, Section 13(d) (PIM allocation
methodology).
---------------------------------------------------------------------------
<bullet> 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.\124\
---------------------------------------------------------------------------
\124\ 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).\125\ Further, proposed
subparagraph (b)(3)(C) will provide that the System cancels any
unexecuted responses (or unexecuted portions).\126\
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\125\ See Cboe Rule 5.72(c)(3)(B) for materially identical
provisions.
\126\ 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
[[Page 94996]]
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.\127\
---------------------------------------------------------------------------
\127\ 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:
<bullet> Class. An Agency Order must in a FLEX Option class the
Exchange designates as eligible for FLEX PIM auctions.
<bullet> 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
above. For a complex FLEX Order, each leg must be in a permissible FLEX
option series that complies with proposed Section 3 above.\128\
---------------------------------------------------------------------------
\128\ See Cboe Rule 5.73(a)(2) for similar provisions, except
the Exchange will add a similar stipulation for each leg of a
complex FLEX Order for clarity.
---------------------------------------------------------------------------
<bullet> Marking. The Initiating Member must mark an Agency Order
for FLEX PIM auction processing.
<bullet> Size. There will be no minimum size for Agency Orders. The
Initiating Order must be for the same size as the Agency Order.
<bullet> 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.\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 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 no
smaller than 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 no
smaller than 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.
---------------------------------------------------------------------------
\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 5.73(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.
\130\ The prices of the FLEX Stock-Option Strategies and FLEX
Stock-Complex Strategies can be expressed to four decimal places,
which is identical to how the stock portion of a non-FLEX Stock-
Option Strategy and a non-FLEX Stock-Complex Strategy can be priced
today. However, the options leg will not be permitted to execute in
increments smaller than one cent ($0.01). See supra note 101.
---------------------------------------------------------------------------
<bullet> 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.\131\ 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).
---------------------------------------------------------------------------
\131\ 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).
---------------------------------------------------------------------------
<bullet> 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 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.\132\ As further discussed below, the proposed
guaranteed allocation process will be based on the guaranteed
allocation process available in non-FLEX PIM auctions, and therefore
the proposed rule change will provide further consistency across the
Exchange's auction mechanism processes.\133\
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\132\ The Exchange will allow the Initiating Member to customize
their guaranteed allocation percentage of the Initiating Order
anywhere from 0% up to 50% of the Agency Order (if there is a
response(s) from one other Member at the same price) or up to 40% of
the Agency Order (if there are responses from two or more Members at
the same price). For example, an Agency Order is entered into FLEX
PIM for 100 contracts. If the Initiating Member only wants to have a
guaranteed allocation of 10% on the Initiating Order that was
entered with the Agency Order, the Initiating Member can stipulate
10% on the Initiating Order. If there are 4 FLEX PIM responses for a
total of 200 contracts at the end of the auction, then the
Initiating Member will only get 10 contracts allocated on its
Initiating Order (i.e., the guaranteed 10% of 100 contracts). Cboe's
rule does not allow for the Initiating Member's guaranteed
allocation percentages to be customized. See infra note 158 for
further discussion on the 50%/40% allocation percentages.
\133\ See infra note 158 for further discussion on the 50%/40%
allocation percentages.
---------------------------------------------------------------------------
<bullet> 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
[[Page 94997]]
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 same time.\134\ 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.
---------------------------------------------------------------------------
\134\ 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. Similar to all other auction
notifications, FLEX PIM auction notification messages will not be
disseminated to OPRA.\135\
---------------------------------------------------------------------------
\135\ 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.\136\ In doing so, the Exchange's
proposal will promote executions in FLEX PIM (instead of cancelling the
FLEX Order) and also prevent executions from occurring after the market
close.
---------------------------------------------------------------------------
\136\ 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 \137\
upon entry into the PIM by improving upon the initial price of the
Counter-Side Order.\138\ Similar to allowing the initiating Member of a
non-FLEX PIM to improve the initial price of its Counter-Side Order,
the Exchange believes that it is appropriate to allow the Initiating
Member of the FLEX PIM to improve the price of its Initiating Order
(i.e., contra-side to the Agency Order) because it would also improve
the stop price of the Agency Order that came in together with the
Initiating Order.\139\
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\137\ Counter-Side Orders (i.e., contra-side to the Agency
Order) for PIM are functionally equivalent to Initiating Orders
(i.e., contra-side order to the Agency Order) for FLEX PIM. See
Options 3, Section 13(b) for a description of Counter-Side Orders.
\138\ See Options 3, Section 13(b)(5) (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).
\139\ As proposed, the Initiating Member enters a paired FLEX
Order into FLEX PIM consisting of an Agency Order and an Initiating
Order (which is the contra-side of the Agency Order). This is
identical to how standard non-FLEX PIM works today in that the
Initiating Member enters a paired order into standard PIM consisting
of an Agency Order and a Counter-Side Order (i.e., the PIM Agency
Order's contra-side, and the functional equivalent to an Initiating
Order on FLEX PIM).
---------------------------------------------------------------------------
Proposed Section 12(c)(5) will govern the requirements for FLEX PIM
responses. Specifically:
<bullet> 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.\140\
---------------------------------------------------------------------------
\140\ See proposed Options 3A, Section 12(c)(5), which is based
on Cboe Rule 5.73(c)(5).
---------------------------------------------------------------------------
<bullet> 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.\141\
---------------------------------------------------------------------------
\141\ 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.
---------------------------------------------------------------------------
<bullet> A Member using the same badge/mnemonic may only submit a
single
[[Page 94998]]
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.\142\
---------------------------------------------------------------------------
\142\ 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.
---------------------------------------------------------------------------
<bullet> 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).\143\
---------------------------------------------------------------------------
\143\ 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.
---------------------------------------------------------------------------
<bullet> FLEX PIM responses must be on the opposite side of the
market as the Agency Order. The System rejects a FLEX PIM response on
the same side of the market as the Agency Order.\144\
---------------------------------------------------------------------------
\144\ See proposed Options 3A, Section 12(c)(5)(D), which is
materially identical to Cboe Rule 5.73(c)(5)(D).
---------------------------------------------------------------------------
<bullet> FLEX PIM responses will not be visible to PIM auction
participants or disseminated to OPRA.\145\
---------------------------------------------------------------------------
\145\ See proposed Options 3A, Section 12(c)(5)(E), which is
materially identical to Cboe Rule 5.73(c)(5)(E).
---------------------------------------------------------------------------
<bullet> A Member may modify or cancel its FLEX PIM responses
during the FLEX PIM auction.\146\
---------------------------------------------------------------------------
\146\ 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 underlying, provided, however, that in such instance the FLEX
PIM auction concludes without execution.\147\
---------------------------------------------------------------------------
\147\ See Cboe Rule 5.73(d) for similar provisions, except the
Exchange will make a minor clarification that this rule applies when
the Exchange halts trading in the affected underlying (and not
series, which is what Cboe currently has in its rule).
---------------------------------------------------------------------------
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.\148\
Proposed subparagraphs (e)(1)-(4) details the FLEX PIM allocation
methodology for the following scenarios:
---------------------------------------------------------------------------
\148\ See Cboe Rule 5.73(e) for similar provisions except the
Exchange will not allow prices to be expressed as a percentage
value.
---------------------------------------------------------------------------
<bullet> 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:
<bullet> Priority Customer responses (in time priority); \149\
---------------------------------------------------------------------------
\149\ See proposed Section 12(e)(1)(A), which is materially
identical to Cboe Rule 5.73(e)(1)(A).
---------------------------------------------------------------------------
<bullet> 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).\150\
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.\151\
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.
---------------------------------------------------------------------------
\150\ 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 158 for further
discussion on the 50%/40% allocation percentages.
\151\ 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 relating to the remaining contracts
scenario and rounding up scenario 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).
---------------------------------------------------------------------------
<bullet> All other FLEX PIM responses, allocated on a Size Pro-Rata
basis (as defined in Options 3, Section 10(c)); \152\ and
---------------------------------------------------------------------------
\152\ 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)).
---------------------------------------------------------------------------
<bullet> The Initiating Order to the extent there are any remaining
contracts.\153\
---------------------------------------------------------------------------
\153\ See proposed Section 12(e)(1)(D), which is materially
identical to Cboe Rule 5.73(e)(1)(D).
---------------------------------------------------------------------------
<bullet> 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:
<bullet> Priority Customer responses (in time priority); \154\
---------------------------------------------------------------------------
\154\ See proposed Section 12(e)(2)(A), which is materially
identical to Cboe Rule 5.73(e)(2)(A).
---------------------------------------------------------------------------
<bullet> Other FLEX PIM responses (in time priority) at prices
better than the final auction price; and
<bullet> 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)).\155\
---------------------------------------------------------------------------
\155\ 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 System behavior for its PIM functionality.
---------------------------------------------------------------------------
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
[[Page 94999]]
price in the order set forth in proposed Section 12(e)(1), as described
above.\156\
---------------------------------------------------------------------------
\156\ See proposed Section 12(e)(2), which is materially
identical to Cboe Rule 5.73(e)(2).
---------------------------------------------------------------------------
<bullet> 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.\157\
---------------------------------------------------------------------------
\157\ See proposed Section 12(e)(3), which is materially
identical to Cboe Rule 5.73(e)(3).
---------------------------------------------------------------------------
<bullet> 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 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.\158\
---------------------------------------------------------------------------
\158\ 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). As
such, the difference between Cboe's rule and ISE's rule will be that
ISE Members will be able to customize their guaranteed allocation
percentages for FLEX PIM (which will follow the non-FLEX PIM
process) while Cboe's rules do not seem to allow this for FLEX AIM.
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 affiliates,
Nasdaq BX, Inc. (``BX'') and Nasdaq PHLX LLC (``Phlx''), have
consistent guaranteed allocation percentages for their standard non-
FLEX price improvement auctions, BX PRISM and Phlx PIXL. See BX
Options 3, Section 13(ii)(A)(1) and Phlx Options 3, Section
13(b)(5)(B).
---------------------------------------------------------------------------
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.\159\
---------------------------------------------------------------------------
\159\ 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.\160\ 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 \161\ 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.\162\ Lastly, proposed Supplementary Material .03
will provide that if an allocation would result in less than one
contract, then one contract will be allocated.\163\ This aligns to how
the Exchange currently allocates contracts in PIM.\164\
---------------------------------------------------------------------------
\160\ See Cboe Rule 5.73, Interpretations and Policies .01 for
materially identical provisions.
\161\ 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.
\162\ See Cboe Rule 5.73, Interpretations and Policies .02 for
materially identical provisions.
\163\ The Exchange notes that it is not proposing to add the
provision from Cboe Rule 5.73, Interpretations and Policies .03 that
states: ``A FLEX Official may nullify a transaction following a FLEX
AIM Auction pursuant to Rule 5.75(b).'' Because the FLEX Official is
a floor concept and the Exchange does not operate a trading floor,
the Exchange will not incorporate this concept into its proposed
FLEX rules. Instead, the Exchange will System-enforce this provision
by rejecting a FLEX PIM auction that does not comply with the
provisions in proposed Options 3A, Section 12.
\164\ 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.\165\
---------------------------------------------------------------------------
\165\ See Cboe Rule 5.74 for similar provisions, except the
Exchange will not add Cboe's language that the Solicited Order
cannot have a Capacity F (i.e., Firm capacity) for the same
executing firm ID (``EFID'') as the Agency Order for the foregoing
reasons. Facilitated orders cannot be entered into FLEX SOM (just
like they cannot be entered into standard SOM today). Since an order
with the capacity of Firm can be valid for a solicitation order, the
Exchange will not System enforce the rejection of Firm capacity
orders to avoid the rejection of contra-side orders that are entered
with a Firm capacity and are, in fact, solicitations at the outset.
Instead, it will monitor for compliance with 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:
<bullet> Class. An Agency Order must in a FLEX Option class the
Exchange designates as eligible for FLEX SOM auctions.
<bullet> 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
above. For a complex FLEX Order, each leg must be in a permissible FLEX
option series that complies with Section 3 above.\166\
---------------------------------------------------------------------------
\166\ See Cboe Rule 5.74(a)(2) for similar provisions, except
the Exchange will add a similar stipulation for each leg of a
complex FLEX Order for clarity.
---------------------------------------------------------------------------
<bullet> Marking. The Initiating Member must mark an Agency Order
for FLEX SOM auction processing.
<bullet> 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). For complex FLEX Orders, this minimum size
requirement will apply to each leg. 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.\167\
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\167\ 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.
Further, the Exchange is adding a minor clarification that the
minimum size requirement will apply to each leg of a complex FLEX
Order.
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[[Page 95000]]
<bullet> 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.\168\ 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 no
smaller than 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,\169\ 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 no
smaller than 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.
---------------------------------------------------------------------------
\168\ 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.
\169\ The prices for FLEX Stock-Option Strategies and FLEX
Stock-Complex Strategies can be expressed to four decimal places,
which is identical to how the stock portion of a non-FLEX Stock-
Option Strategy and a non-FLEX Stock-Complex Strategy can be priced
today. See supra note 101.
---------------------------------------------------------------------------
<bullet> 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.\170\
---------------------------------------------------------------------------
\170\ 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.\171\
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.
---------------------------------------------------------------------------
\171\ 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. Similar
to all other auction notifications, 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
[[Page 95001]]
System functionality in this regard.\172\ In doing so, the Exchange's
proposal will promote executions in FLEX SOM (instead of cancelling the
FLEX Order) while also preventing executions from occurring after the
market close.
---------------------------------------------------------------------------
\172\ 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.\173\
---------------------------------------------------------------------------
\173\ 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:
<bullet> 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.\174\
---------------------------------------------------------------------------
\174\ See proposed Options 3A, Section 13(c)(5), which is based
on Cboe Rule 5.74(c)(5).
---------------------------------------------------------------------------
<bullet> 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.\175\
---------------------------------------------------------------------------
\175\ 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.
---------------------------------------------------------------------------
<bullet> 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.\176\
---------------------------------------------------------------------------
\176\ 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 Exchange's standard non-FLEX rules are
currently silent in this regard, the Exchange is making these
concepts clear in the proposed FLEX language. Ultimately the
Exchange's proposed FLEX SOM functionality in this regard will align
to current non-FLEX auction functionality, including SOM auctions in
Options 3, Section 11(d).
---------------------------------------------------------------------------
<bullet> The System will cap the size of a FLEX SOM 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 SOM
auction).\177\
---------------------------------------------------------------------------
\177\ 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).
---------------------------------------------------------------------------
<bullet> 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.\178\
---------------------------------------------------------------------------
\178\ See proposed Options 3A, Section 13(c)(5)(D), which is
materially identical to Cboe Rule 5.74(c)(5)(D).
---------------------------------------------------------------------------
<bullet> FLEX SOM responses will not be visible to FLEX SOM auction
participants or disseminated to OPRA.\179\
---------------------------------------------------------------------------
\179\ See proposed Options 3A, Section 13(c)(5)(E), which is
materially identical to Cboe Rule 5.74(c)(5)(E).
---------------------------------------------------------------------------
<bullet> A Member may modify or cancel its FLEX SOM responses
during a FLEX SOM auction.\180\
---------------------------------------------------------------------------
\180\ 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 underlying, provided, however, that in such instance the FLEX
SOM auction concludes without execution.\181\
---------------------------------------------------------------------------
\181\ See Cboe Rule 5.74(d) for similar provisions, except the
Exchange will make a minor clarification that this rule applies when
the Exchange halts trading in the affected underlying (and not
series, which is what Cboe currently has in its rule).
---------------------------------------------------------------------------
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.\182\ Proposed subparagraphs (e)(1)-(3) detail
the FLEX SOM allocation methodology for the following scenarios:
---------------------------------------------------------------------------
\182\ See Cboe Rule 5.74(e) for similar provisions except the
Exchange will not allow prices to be expressed as a percentage
value.
---------------------------------------------------------------------------
<bullet> 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.\183\
---------------------------------------------------------------------------
\183\ See proposed Section 13(e)(1), which is materially
identical to Cboe Rule 5.74(e)(1).
---------------------------------------------------------------------------
<bullet> 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:
<bullet> Priority Customer FLEX SOM responses (in time priority);
\184\ and
---------------------------------------------------------------------------
\184\ See proposed Section 13(e)(2)(A), which is materially
identical to Cboe Rule 5.74(e)(2)(A).
---------------------------------------------------------------------------
<bullet> All other FLEX SOM responses, allocated on a Size Pro-Rata
basis (as defined in Options 3, Section 10(c)).\185\
---------------------------------------------------------------------------
\185\ 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)).
---------------------------------------------------------------------------
<bullet> 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.\186\
---------------------------------------------------------------------------
\186\ 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.\187\
---------------------------------------------------------------------------
\187\ 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
[[Page 95002]]
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.\188\ 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.\189\ Lastly,
proposed Supplementary Material .03 will provide that if an allocation
would result in less than one contract, then one contract will be
allocated.\190\ This aligns to how the Exchange currently allocates
contracts in SOM.\191\
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\188\ See Cboe Rule 5.74, Interpretations and Policies .01 for
materially identical provisions.
\189\ 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.
\190\ The Exchange notes that it is not proposing to add the
provision from Cboe Rule 5.74, Interpretations and Policies .03 that
states: ``A FLEX Official may nullify a transaction following a FLEX
SAM Auction pursuant to Rule 5.75(b).'' Because the FLEX Official is
a floor concept and the Exchange does not operate a trading floor,
the Exchange will not incorporate this concept into its proposed
FLEX rules. Instead, the Exchange will System-enforce this provision
by rejecting a FLEX SAM auction that does not comply with the
provisions in proposed Options 3A, Section 13.
\191\ 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. Risk protections
are protections in our System to help minimize risk. The risk
protections specified in proposed Options 3A, Sections 14(a) and 14(b)
are mandatory whereas the risk protections specified in proposed
Options 3A, Section 14(c) are optional. 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 and Size Limitation.\192\ As set forth in Options 3,
Section 15(a)(1)(C), Market Wide Risk Protections are mandatory
activity-based protections that allow Members to establish limits for
order entry and execution rate during a specified period of time. The
System maintains separate counts for each of the thresholds specified
in the rule over rolling periods of time.\193\ 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. Similar to how Market Wide Risk Protection
assists Members in better managing their risk in the standard non-FLEX
market on ISE today, the Exchange believes that applying Market Wide
Risk Protection to its FLEX market will be beneficial for Members using
FLEX trading.
---------------------------------------------------------------------------
\192\ 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).
\193\ As set out in Options 3, Section 15(a)(1)(C), the Market
Wide Risk Protection will have counting programs that will maintain
separate counts, over rolling time periods specified by the Member
for each count, of: (1) the total number of orders entered in the
regular order book; (2) the total number of orders entered in the
complex order book with only options legs; (3) the total number of
Stock-Option and Stock-Complex Orders; (4) the total number of
contracts traded in regular orders; (5) the total number of
contracts traded in Complex Options Orders; and (6) the total number
of contracts traded in Stock-Option and Stock-Complex Orders. As
applied to FLEX, only items (4) through (6) of the foregoing will
apply. Items (1) through (3) will not apply to FLEX because there is
no order book for FLEX. The Exchange notes that Options 3, Section
15(a)(1)(C)(5) (i.e., item (5) of the foregoing) presently refers to
Stock-Option and Stock Complex Orders, instead of Complex Options
Orders. However, ISE will file a clean-up amendment so that
subparagraph (5) will refer instead to Complex Options Orders. This
clean-up will align ISE's rule to MRX Options 3, Section
15(a)(1)(C).
---------------------------------------------------------------------------
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)), Size
Limitation,\194\ the Price Limit for Complex Order protections as
appliable to the stock component (as described in Options 3, Section
16(a)),\195\ the Stock-Tied NBBO protections (as described in Options
3, Section 16(d)),\196\ and the Stock-Tied Reg SHO protections (as
described in Options 3, Section 16(e)).\197\
---------------------------------------------------------------------------
\194\ 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).
\195\ The Exchange amended the Price Limits for Complex Order
protections in Options 3, Section 16(a) for its standard non-FLEX
complex market as part of the technology migration to enhanced
Nasdaq functionality discussed above. See supra note 11. See also
Securities Exchange Act Release No. 98066 (August 7, 2023), 88 FR
54672 (August 11, 2023) (SR-ISE-2023-13).
\196\ The Exchange introduced the Stock-Tied NBBO protections in
Options 3, Section 16(d) for its standard non-FLEX complex market as
part of the technology migration to enhanced Nasdaq functionality
discussed above. See supra note 11. See also Securities Exchange Act
Release No. 98066 (August 7, 2023), 88 FR 54672 (August 11, 2023)
(SR-ISE-2023-13).
\197\ The Exchange introduced the Stock-Tied Reg SHO protections
in Options 3, Section 16(e) for its standard non-FLEX complex market
as part of the technology migration to enhanced Nasdaq functionality
discussed above. See supra note 11. See also Securities Exchange Act
Release No. 98066 (August 7, 2023), 88 FR 54672 (August 11, 2023)
(SR-ISE-2023-13).
---------------------------------------------------------------------------
The Strategy Protections listed in Options 3, Section 16(b) are the
Vertical Spread Protection,\198\ Calendar Spread Protection,\199\
Butterfly Spread Protection,\200\ and Box Spread Protection.\201\ These
Strategy Protections are all aimed at preventing the potential
execution of the specified complex strategies (i.e., vertical spread,
calendar spread, butterfly spread, and box spread) outside of specified
price parameters in order to prevent executions at undesirable prices.
Today, Strategy Protections do not apply to
[[Page 95003]]
orders and responses submitted into non-FLEX PIM and non-FLEX SOM.\202\
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.
---------------------------------------------------------------------------
\198\ The Vertical Spread Protection will apply to a vertical
spread. A vertical spread is an order to buy a call (put) option and
to sell another call (put) option in the same security with the same
expiration but at a higher (lower) strike price. See Options 3,
Section 16(b)(1).
\199\ The Calendar Spread Protection will apply to a Calendar
Spread. A calendar spread is an order to buy a call (put) option
with a longer expiration and to sell another call (put) option with
a shorter expiration in the same security at the same strike price.
See Options 3, Section 16(b)(2).
\200\ The Butterfly Spread Protection will apply to a butterfly
spread. A butterfly spread is a three legged Complex Order with the
following: (1) two legs to buy (sell) the same number of calls
(puts); (2) one leg to sell (buy) twice the number of calls (puts)
with a strike price at mid-point of the two legs to buy (sell); (3)
all legs have the same expiration; and (4) each leg strike price is
equidistant from the next sequential strike price. See Options 3,
Section 16(b)(3).
\201\ The Box Spread Protection will apply to a box spread. A
box spread is a four legged Complex Order with the following: (1)
one pair of legs with the same strike price with one leg to buy a
call (put) and one leg to sell a put (call); (2) a second pair of
legs with a different strike price from the pair described in (1)
with one leg to sell a call (put) and one leg to buy a put (call);
(3) all legs have the same expiration; and (4) all legs have equal
volume. See Options 3, Section 16(b)(4).
\202\ See Options 3, Section 16(b), which describes the non-
applicability of the Strategy Protections to certain auction
mechanisms. See also Securities Exchange Act Release No. 100743
(August 16, 2024), 89 FR 68014 (August 22, 2024) (SR-ISE-2024-39)
(effective but not yet operative). As amended by SR-ISE-2024-39,
Options 3, Section 16(b) would provide that the Strategy Protections
will not apply when a standard non-FLEX complex order includes at
least one p.m.-settled leg and at least one a.m.-settled leg. This
would likewise be true for complex FLEX Orders (i.e., the Strategy
Protections would not apply when a complex FLEX Order includes at
least one p.m.-settled leg and at least one a.m.-settled leg).
---------------------------------------------------------------------------
As noted above, the Exchange adopted the Price Limit for Complex
Order protections in Options 3, Section 16(a),\203\ the Stock-Tied NBBO
protections in Options 3, Section 16(d),\204\ and the Stock-Tied Reg
SHO protections in Options 3, Section 16(e) \205\ (collectively, the
``Stock-Tied Risk Protections'') as part of SR-ISE-2023-13 for its
standard non-FLEX complex market. The Exchange is now proposing to
apply the Stock-Tied Risk Protections to complex FLEX Orders to the
extent the complex FLEX Order has a stock component. The Price Limits
for Complex Orders in Options 3, Section 16(a) seek to prevent complex
executions from occurring outside of certain price limits that are tied
to the NBBO for the options series or for any stock component. Because
there will be no book for FLEX trading (and therefore no NBBO for the
FLEX Options series), the Exchange will not apply the price limit
protection tied to the NBBO for the options series for FLEX trading. To
the extent the complex FLEX Order has a stock component, the Exchange
will only apply the price limit protection tied to the NBBO for the
stock component. The below is an example of how the Exchange will apply
the Options 3, Section 16(a) price protection to complex FLEX Orders.
---------------------------------------------------------------------------
\203\ Specifically, Options 3, Section 16(a) states that as
provided in Options 3, Section 14(d)(2), the legs of a complex
strategy may be executed at prices that are inferior to the prices
available on other exchanges trading the same options series.
Notwithstanding, the System will not permit any leg of a complex
strategy to trade through the NBBO for the series or any stock
component by a configurable amount calculated as the lesser of (i)
an absolute amount not to exceed $0.10, and (ii) a percentage of the
NBBO not to exceed 500%, as determined by the Exchange on a class,
series or underlying basis. A Member can also include an instruction
on a Complex Order that each leg of the Complex Order is to be
executed only at a price that is equal to or better than the NBBO
for the options series or any stock component, as applicable (``Do-
Not-Trade-Through'' or ``DNTT''). As discussed later in this filing,
the NBBO price limit for the option series will not apply to complex
FLEX orders; however, the NBBO price limit for the stock component
will apply.
\204\ Specifically, Options 3, Section 16(d) provides that for
Complex Orders in Stock-Option Strategies and Stock-Complex
Strategies, the Exchange shall electronically communicate the
underlying security component of a Complex Order to Nasdaq Execution
Services, LLC (``NES''), its designated broker dealer, for immediate
execution. Such execution and reporting will not occur on the
Exchange and will be handled by NES pursuant to applicable rules
regarding equity trading. NES will ensure that the execution price
is within the high-low range for the day in that stock at the time
the Complex Order is processed and within a certain price from the
current market pursuant to Options 3, Section 16(a). If the stock
price is not within these parameters, the Complex Order is not
executable and the Exchange will hold the Complex Order on the Order
Book, if consistent with Member instructions. This risk protection
will apply wholesale to complex FLEX Orders with a stock component.
\205\ Specifically, Options 3, Section 16(e) provides that when
the short sale price test in Rule 201 of Regulation SHO is triggered
for a covered security, NES will not execute a short sale order in
the underlying covered security component of a Complex Order if the
price is equal to or below the current national best bid. However,
NES will execute a short sale order in the underlying covered
security component of a Complex Order if such order is marked
``short exempt,'' regardless of whether it is at a price that is
equal to or below the current national best bid. If NES cannot
execute the underlying covered security component of a Complex Order
in accordance with Rule 201 of Regulation SHO, the Exchange will
hold the Complex Order on the Complex Order Book, if consistent with
Member instructions. The order may execute at a price that is not
equal to or below the current national best bid. For purposes of
this paragraph, the term ``covered security'' shall have the same
meaning as in Rule 201(a)(1) of Regulation SHO. This risk protection
will apply wholesale to complex FLEX Orders with a stock component.
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Scenario illustrating applicability of the stock buffer described
in Options 3, Section 16(a) Price Limits for Complex Orders:
IBM Underlying/Stock NBBO is 1.00 x 2.00
Stock buffer is configured to the lesser of $0.05 or 5%
FLEX Option NBBO does not exist, but the minimum trading increment/
minimum price variation (MPV) for option leg executions is $0.01
<bullet> FLEX Auction is entered in a Stock-Complex Strategy
encompassing 2 IBM FLEX Put options: Buy 1 Put (FLEX option leg A) +
Buy 1 Put (FLEX option leg B) + Buy 100 shares IBM stock: Buy 110 units
of the A + B + Stock strategy @net price of $1.02.
<bullet> A firm responds to Sell 110 @net price of $0.89.
FLEX Auction timer passes & auction concludes
<bullet> The firm's response trades with the FLEX Auction order 110
@net price of $0.97 because the stock component cannot trade at any
price lower than $0.95 ($1.00-$0.05 [price limit for stock component] =
$0.95) and the FLEX option legs cannot trade at any price lower than
$0.01 as this is the minimum trading increment for option legs;
therefore, the minimum stock price of $0.95 plus the $0.01 minimum
option leg price means that, despite the $0.89 limit price on the
response, the strategy cannot trade below $0.97 ($0.95 + [$0.01*2
legs]).
As it relates to the other Stock-Tied Risk Protections (i.e., the
Stock-Tied NBBO protections and the Stock-Tied Reg SHO protections),
these will apply wholesale to complex FLEX Orders with a stock
component as noted above.
Proposed Section 14(c) will provide that the optional risk
protections in Options 3, Section 28 are available to FLEX
Options.\206\ In particular, the following are optional risk
protections in Options 3, Section 28: (1) notional dollar value per
order (which will be calculated as quantity multiplied by limit price
multiplied by number of underlying shares), (2) daily aggregate
notional dollar value, (3) quantity per order, and (4) daily aggregate
quantity. In sum, Members may set thresholds for each of the foregoing
protections in order to limit the quantity and notional value they can
send per order and on aggregate for the day.
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\206\ The Exchange introduced the optional risk protections in
Options 3, Section 28 as part of the technology migration to
enhanced Nasdaq functionality discussed above. See Securities
Exchange Act Release No. 96818 (February 6, 2023), 88 FR 8950
(February 10, 2023) (SR-ISE-2023-06).
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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).\207\ 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
[[Page 95004]]
23(a)(5).\208\ 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. Today, simple and complex auction notifications inform
Members that an auction order has been accepted by the System and that
an auction is commencing. Auction notifications also contain all of the
relevant information Members need to respond to that particular
auction.\209\ As proposed, the simple and complex FLEX auction
notifications will likewise inform Members that a FLEX auction order
has been accepted by the System, a FLEX auction is commencing, and will
also contain all of the relevant information Members need to respond to
that particular FLEX auction.\210\ The FLEX auction notifications will
specify that a particular auction is FLEX versus non-FLEX. As is the
case today for non-FLEX auctions, FLEX auction notifications
disseminated over the Order Feed and the Spread Feed will be available
to all Members that elect to receive such notification messages.
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\207\ 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.
\208\ 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. The Exchange notes that as applied to FLEX, the
majority of the data elements in the Spread Feed will not applicable
to FLEX Options (e.g., data aggregated at the top five price levels
(BBO) on both the bid and offer side of the market and aggregate
bid/ask quote size). While other data elements (e.g., options orders
for all Complex Orders and last trades information) also apply to
FLEX, the Exchange is pointing out auction notifications in the
proposed rule to be transparent about the most salient feature for
complex FLEX Orders.
\209\ For example, at the commencement of a standard, non-FLEX
PIM auction, the Exchange sends a broadcast message (i.e., auction
notification) that includes the series, price and size of the Agency
Order, and whether it is to buy or sell, through the Order Feed. See
Options 3, Section 13(c).
\210\ For example, at the commencement of a FLEX PIM Auction,
the Exchange would send 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. See proposed Options 3A,
Section 12(c)(2).
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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.\211\ Only the Primary Market Maker in the non-FLEX Option
may be the assigned Primary Market Maker in that FLEX Option.\212\
Today, in order for Market Makers to submit auction responses in option
classes through SQF, they need to be appointed to that option
class.\213\ As such, the Exchange is automatically carrying over the
FLEX Market Maker's non-FLEX options class appointment as its FLEX
option class appointment in order to allow the FLEX Market Maker to
respond to the electronic FLEX Auction, FLEX PIM, and FLEX SOM as
described above.
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\211\ See Cboe Rule 3.58(c) for materially identical provisions.
\212\ 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.
\213\ See supra note 68 describing SQF features available in the
Exchange's non-FLEX market today (including the ability for Market
Makers to currently send auction responses). As discussed above, the
Exchange is proposing to also allow FLEX auction responses through
SQF.
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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.\214\
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\214\ See Cboe Rule 5.57 for similar provisions related to FLEX
Market Makers. 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. As discussed above, 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.
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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.\215\
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\215\ 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.
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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
its own market.
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)-(4) 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.\216\
Proposed Section 18(a)(2) will provide that except as otherwise
provided in subparagraph (a)(3) of this Rule, in no event shall the
position limits for broad-based FLEX Index Options exceed 25,000
contracts on the same side of the market.\217\ Proposed Section
18(a)(3) will provide that there shall be no position limits for broad-
based index options listed in Options 4A, Section 6(a).\218\ However,
each Member (other than FLEX Market Makers) that maintains a FLEX
broad-based index option position on the same side of the market in
excess of 100,000 contracts in NDX or RUT for its own account or for
the account of a customer, shall report information as to whether the
positions are hedged and provide documentation as to how such contracts
are hedged, in the manner and form required by the Exchange. In
calculating the applicable contract-reporting amount, reduced-value
contracts will be aggregated with full-value contracts and counted by
the amount by which they equal a full-value contract (e.g., 10 MNX
options equal 1 NDX full-value contract). The Exchange may impose other
reporting requirements as well as the limit at which the reporting
requirement may be triggered.\219\ Whenever the Exchange
[[Page 95005]]
determines that additional margin is warranted in light of the risks
associated with an under-hedged FLEX NDX or RUT options position, the
Exchange may impose additional margin upon the account maintaining such
under-hedged position pursuant to its authority under Options 6C,
Section 5. The clearing firm carrying the account also 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
requirements.\220\
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\216\ Options 4A, Sections 6 and 7 presently set forth the
position limits for broad-based and industry index options,
respectively.
\217\ This separate same side position limit for broad-based
FLEX Index Options (except for the ones noted below) is based on the
Exchange's same side position limit for its standard market as set
forth in Options 4A, Section 6(a).
\218\ 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.
\219\ See Options 4A, Section 9(a)(13) (setting forth the same
reporting requirements for the Exchange's standard non-FLEX index
options market). See also Cboe Rule 8.35(b) for similar reporting
requirements.
\220\ See Options 4A, Section 9(a)(14) (setting forth the same
stipulation for the Exchange's standard index options market). See
also Cboe Rule 8.35(b) for similar stipulations.
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Proposed Section 18(a)(4) will provide that industry-based FLEX
Index Options shall be subject to separate position limits of 18,000,
24,000, or 31,500 contracts, depending on the position limit tier
determined pursuant to Options 4A, Section 7(a)(1).\221\
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\221\ The proposed position limits align to the Exchange's non-
FLEX position limits for industry index options in Options 4A,
Section 7(a)(1).
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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 with the
exceptions noted below.\222\ Pursuant to proposed Section 18(b)(2),
each Member (other than a Market Maker) that maintains a 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.\223\ 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.\224\
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.\225\
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\222\ 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).
\223\ See Cboe Rule 8.35(c)(2) for materially identical
provisions.
\224\ 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.
\225\ See Cboe Rule 8.35(c)(3) for materially identical
provisions.
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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
18(b)(1)(B),\226\ 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.\227\
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.\228\ 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
\229\ 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 (for broad-based index options) or Section 7 (for
narrow-based index options), as applicable.\230\ 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.\231\
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\226\ 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.
\227\ See Cboe Rule 8.35(d) for materially identical provisions.
\228\ See Cboe Rule 8.35(d)(1) for materially identical
provisions.
\229\ The Exchange notes that all FLEX Index Options will be
cash settled.
\230\ 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.
\231\ See Cboe Rule 8.35(d)(3) for materially identical
provisions.
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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.\232\ 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).\233\
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\232\ 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), which are similar index products on ISE.
\233\ 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.
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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.\234\ 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.\235\ Proposed Section 19(a)(3) will stipulate that except as
provided in
[[Page 95006]]
proposed Section 18(b)(1)(B) and Section 18(c) above,\236\ FLEX Options
shall not be taken into account when calculating exercise limits for
non-FLEX Option contracts.\237\ 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.\238\
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\234\ See Cboe Rule 8.42(g)(1) for materially identical
provisions.
\235\ See Cboe Rule 8.42(g)(2) for materially identical
provisions.
\236\ 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 and that positions in such cash-settled FLEX
Equity Options will be aggregated with positions in physically
settled options on the same underlying ETF. Cash-settled FLEX Equity
Options will be discussed later in this filing.
\237\ See Cboe Rule 8.42(g)(3) for materially identical
provisions.
\238\ See Phlx Options 8, Section 34(b)(8)(D) for materially
identical provisions.
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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.\239\
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\239\ The Exchange will report FLEX Option trades and, if
necessary, trade cancellations to OPRA.
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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 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. Additionally, taking into consideration that FLEX Options
have unique characteristics, the Exchange has reviewed its catalog of
patterns and updated a number of patterns to include FLEX Options
transactions for when they begin trading. The Exchange will
periodically review its surveillance procedures and make any changes
that the Exchange believes are necessary for FLEX trading.
As discussed in more detail in the ``Cash-Settled FLEX ETFs''
section below, the Exchange is also a member of the Intermarket
Surveillance Group (``ISG''),\240\ and works with other self-regulatory
organizations and exchanges on intermarket surveillance related issues
through its participation in the ISG. As discussed in the ``Cash-
Settled FLEX ETFs'' section below, the Exchange and all other ISG
members can and do share information for regulatory purposes.
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\240\ 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.
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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,\241\ while all FLEX Index Options will be settled
by delivery in cash.\242\ 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 \243\ and Cboe Rule
4.21(b)(5)(A) \244\ allow for cash-settled FLEX ETF Options as well.
The Exchange's proposed rule changes for cash-settled ETF Options will
be based on NYSE American Rule 903G and Cboe Rule 4.21(b)(5)(A).
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\241\ See proposed Options 3A, Section 3(c)(5)(A)(i).
\242\ See proposed Options 3A, Section 3(c)(5)(B). As discussed
below, cash settlement is also permitted in the OTC market. Trading
in cash-settled FLEX ETF Options will not commence until the related
reporting requirements are finalized.
\243\ 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).
\244\ Cboe also filed an immediately effective rule change 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).
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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 a defined six-mont
[…truncated; see source link]Indexed from Federal Register on November 29, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.