[Federal Register Volume 84, Number 209 (Tuesday, October 29, 2019)]
[Notices]
[Pages 57908-57911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23547]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87390; File No. SR-ISE-2019-26]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the
Market Maker Plus Program
October 23, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 10, 2019, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I and II, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the Exchange's Market Maker Plus
program under Options 7, Section 3.
The text of the proposed rule change is available on the Exchange's
website at http://ise.cchwallstreet.com/, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend the
qualifications for Market Makers to achieving Market Maker Plus status.
The Exchange initially filed the proposed pricing changes on
October 1, 2019 (SR-ISE-2019-25). On October 10, 2019, the Exchange
withdrew that filing and submitted this filing.
As set forth in Section 3 of the Pricing Schedule, the Exchange
operates a Market Maker Plus program for regular orders in Select
Symbols \3\ that provides the below tiered rebates to Market Makers \4\
based on time spent quoting at the National Best Bid or National Best
Offer (``NBBO''). This program is designed to reward Market Makers that
contribute to market quality by maintaining tight markets in Select
Symbols.
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\3\ ``Select Symbols'' are options overlying all symbols listed
on the Nasdaq ISE that are in the Penny Pilot Program.
\4\ The term ``Market Makers'' refers to ``Competitive Market
Makers'' and ``Primary Market Makers'' collectively. See Options 1,
Section 1(a)(20).
\5\ To encourage Market Makers to maintain quality markets in
SPY, QQQ, and IWM in particular, members that maintain tight markets
in those symbols are eligible for higher regular maker rebates and
may also be eligible for linked maker rebates, as shown in the table
above. Specifically, the following symbols are linked for purposes
of the linked maker rebate: (1) SPY and QQQ, and (2) SPY and IWM.
Market Makers that qualify for Market Maker Plus Tiers 2-4 above for
executions in SPY, QQQ, or IWM may be eligible for a linked maker
rebate in a linked symbol in addition to the regular maker rebate
for the applicable tier. The linked maker rebate applies to
executions in SPY, QQQ, or IWM if the Market Maker does not achieve
the applicable tier in that symbol but achieves the tier (i.e., any
of Market Maker Plus Tiers 2-4) for any badge/suffix combination in
the other linked symbol, in which case the higher tier achieved
applies to both symbols. If a Market Maker would qualify for a
linked maker rebate in SPY based on the tier achieved in QQQ and the
tier achieved in IWM then the higher of the two linked maker rebates
will be applied to SPY. The regular maker rebate will be provided in
the symbol that qualifies the Market Maker for the higher tier based
on percentage of time at the NBBO.
Select Symbols Other Than SPY, QQQ, IWM, AMZN, FB, and NVDA
------------------------------------------------------------------------
Market Maker Plus tier (specified percentage) Maker rebate
------------------------------------------------------------------------
Tier 1 (80% to less than 85%)........................... ($0.15)
Tier 2 (85% to less than 95%)........................... (0.18)
Tier 3 (95% or greater)................................. (0.22)
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SPY, QQQ, and IWM
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Market Maker Plus tier (specified Regular Maker Linked Maker
percentage) rebate rebate \5\
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Tier 1 (70% to less than 80%)........... ($0.00) N/A
Tier 2 (80% to less than 85%)........... (0.18) (0.15)
Tier 3 (85% to less than 90%)........... (0.22) (0.19)
Tier 4 (90% or greater)................. (0.26) (0.23)
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[[Page 57909]]
AMZN, FB, and NVDA
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Maker rebate
Market Maker Plus tier (specified percentage) \6\
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Tier 1 (70% to less than 85%)........................... ($0.15)
Tier 2 (85% to less than 95%)........................... (0.18)
Tier 3 (95% or greater)................................. (0.22)
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Market Makers are evaluated each trading day for the percentage of
time spent on the NBBO for qualifying series that expire in two
successive thirty calendar day periods beginning on that trading day. A
Market Maker Plus is a Market Maker who is on the NBBO a specified
percentage of the time on average for the month based on daily
performance in the qualifying series for each of the two successive
periods described above. Qualifying series are series trading between
$0.03 and $3.00 (for options whose underlying stock's previous trading
day's last sale price was less than or equal to $100) and between $0.10
and $3.00 (for options whose underlying stock's previous trading day's
last sale price was greater than $100) in premium. If a Market Maker
would qualify for a different Market Maker Plus tier in each of the two
successive 30 calendar day periods, then the lower of the two Market
Maker Plus tier rebates shall apply to all contracts.\7\ A Market
Maker's worst quoting day each month for each of the two successive
periods described above, on a per symbol basis, is excluded in
calculating whether a Market Maker qualifies for this rebate.\8\
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\6\ Market Makers that qualify for Market Maker Plus Tiers 1-3
above for executions in two out of the three symbols AMZN, FB, or
NVDA will be eligible for a maker rebate in the third symbol, in
addition to the maker rebate for the applicable tier in the other
two symbols. The maker rebate will apply to executions in AMZN, FB,
or NVDA if the Market Maker does not achieve the applicable tier in
that symbol but achieves the tier (i.e., any of Market Maker Plus
Tiers 1-3) for any badge/suffix combination in the other two
symbols. If a Market Maker would qualify for different Market Maker
Plus Tiers 1-3 in two symbols, then the lower of the two maker
rebates will be applied to the third symbol (e.g., Market Maker Plus
qualification in Tier 1 and Tier 2 across two symbols would earn
Market Maker Plus Tier 1 in the third symbol). If all three symbols
separately achieve any of the Market Maker Plus Tiers 1-3, the
symbol that achieves the tier with the lowest maker rebate will
instead receive the same maker rebate as the symbol that achieved
the next lowest tier.
\7\ Market Makers may enter quotes in a symbol using one or more
unique, exchange assigned identifiers--i.e., badge/suffix
combinations. Market Maker Plus status is calculated independently
based on quotes entered in a symbol for each of the Market Maker's
badge/suffix combinations, and the highest tier achieved for any
badge/suffix combination quoting that symbol applies to executions
across all badge/suffix combinations that the member uses to trade
in that symbol. Only badge/suffix combinations quoting a minimum of
ten trading days within the month will be used to determine whether
the Market Maker Plus status has been met and the specific tier to
be applied to the Market Maker's performance for that month.
\8\ In addition, the Exchange may exclude from any member's
monthly Market Maker Plus tier calculation any Unanticipated Event;
provided that the Exchange will only remove the day for members that
would have a lower time at the NBBO for the specified series with
the day included. See Options 7, Section 1(a)(2) for the definition
of ``Unanticipated Event.''
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While the Exchange believes that the Market Maker Plus program has
been successful overall in encouraging better market quality in Select
Symbols, the Exchange has also observed that in extremely volatile
months, Market Makers are less likely to meet the stringent Market
Maker Plus tier qualifications for that month because they are unable
to hit the tiers as easily. The Exchange therefore proposes to change
its Market Maker Plus qualifications to avoid penalizing Market Makers
that have historically contributed to market quality on the Exchange.
In particular, the Exchange proposes that a Market Maker who qualifies
for Market Maker Plus Tiers 2 or higher in at least four of the
previous six months will be eligible to receive a reduced Tier 2 rebate
in a given month where the Market Maker does not qualify for any Market
Maker Plus Tiers.\9\ This rebate will be the applicable Tier 2 rebate
reduced by $0.08 per contract (i.e., $0.10 per contract for the regular
maker rebate or $0.07 per contract for the linked maker rebate).
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\9\ Except in SPY, QQQ, and IWM, if a Market Maker qualifies for
Market Maker Plus Tier 1 in a given month after qualifying for Tier
2 or higher in at least four of the previous six months, the Market
Maker would receive the higher $0.15 per contract Tier 1 rebate for
that month instead of a reduced Tier 2 rebate of $0.10 per contract.
Today, the Exchange does not provide any rebates to Market Makers
for meeting the Market Maker Plus Tier 1 qualifications in SPY, QQQ
IWM. See Options 7, Section 3, note 5.
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For example, Market Maker 1 (``MM 1'') meets the SPY Market Maker
Plus Tier 2 level in all of the previous 6 months. In the current
month, there is a significant increase in volatility and MM 1 is unable
to meet the stringent Market Maker Plus requirements within the month.
With the proposal, MM 1 would receive a reduced rebate of $0.10 per
contract (i.e., the SPY Tier 2 $0.18 per contract rebate reduced by
$0.08 per contract) in the current month based on meeting the Market
Maker Plus Tier 2 qualifications in SPY for at least 4 out of the
previous six months.
Applicability to and Impact on Participants
With the proposed changes, the Exchange seeks to avoid penalizing
historically strong Market Maker Plus program participants in similar
situations as the one outlined above, thereby easing the burden on
Market Makers to maintain their Market Maker Plus qualification, which
ultimately will fortify its Market Maker Plus program. Of course, the
Market Maker would still need to meet the stringent requirements of the
applicable Market Maker Plus Tier 2 qualifications \10\ at least four
of the six previous months in order to glean the benefits of the
reduced rebate proposed above. The Market Maker would also need to meet
the rigorous Tier 2 qualifications each month going forward to maintain
the four-month cushion in order to gather the proposed rebate benefits.
By fortifying participation in this program, the Exchange believes that
the proposed changes will continue to encourage Market Makers to post
tight markets in Select Symbols, thereby improving trading conditions
for all market participants through narrower bid-ask spreads and
increased depth of liquidity available at the inside market.
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\10\ Thus, a Market Maker would need to be on the NBBO at least
80% of the time (i.e., Tier 2 or higher) for SPY, QQQ, and IWM, and
at least 85% of the time for all other Select Symbols.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\11\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\12\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees, and
other charges among members and issuers and other persons using any
facility, and is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange believes that the proposed changes to its Market Maker
Plus program is reasonable and equitable for several reasons. As a
threshold matter, the Exchange is
[[Page 57910]]
subject to significant competitive forces in the market for options
transaction services that constrain its pricing determinations in that
market. The fact that this market is competitive has long been
recognized by the courts. In NetCoalition v. Securities and Exchange
Commission, the D.C. Circuit stated as follows: ``[n]o one disputes
that competition for order flow is `fierce.' . . . As the SEC
explained, `[i]n the U.S. national market system, buyers and sellers of
securities, and the broker-dealers that act as their order-routing
agents, have a wide range of choices of where to route orders for
execution'; [and] `no exchange can afford to take its market share
percentages for granted' because `no exchange possesses a monopoly,
regulatory or otherwise, in the execution of order flow from broker
dealers'. . . .'' \13\
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\13\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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Numerous indicia demonstrate the competitive nature of this market.
For example, clear substitutes to the Exchange exist in the market for
options transaction services. The Exchange is only one of sixteen
options exchanges to which market participants may direct their order
flow. Within this environment, market participants can freely and often
do shift their order flow among the Exchange and competing venues in
response to changes in their respective pricing schedules.
Within the foregoing context, the proposal represents a reasonable
attempt by the Exchange to increase its liquidity and market share
relative to its competitors. As noted above, the Exchange's proposal is
intended to fortify participation in the Market Maker Plus program,
which the Exchange believes has been successful overall in encouraging
better market quality in Select Symbols. The Exchange believes that
further encouraging Market Makers to maintain tight markets in Select
Symbols will increase liquidity and attract additional order flow to
the Exchange, which benefits all market participants in the quality of
order interaction.
In particular, the Exchange's proposal to provide a reduced rebate
to Market Makers who do not qualify for any Market Maker Plus tiers in
a given month, but qualified for Market Maker Plus Tier 2 or higher in
at least four of the previous six months preserves the intent of the
Market Maker Plus program to reward Market Makers who contribute to
market quality by maintaining tight markets based on time spent quoting
at the NBBO. The Exchange proposes to provide the reduced rebate to
Market Makers that qualified for Market Maker Plus Tier 2 or higher in
the requisite time period as opposed to Market Maker Plus Tier 1
because Tier 1 currently does not provide rebates to qualifying Market
Makers across all Select Symbols.\14\
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\14\ In particular, Market Makers that qualify for Market Maker
Plus Tier 1 in SPY, QQQ or IWM currently do not receive any rebates,
so it would not be feasible to apply the proposed reduction of $0.08
to those symbols at the Tier 1 level.
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As discussed above, the Exchange has observed that in extremely
volatile months, Market Makers are less likely to meet the stringent
Market Maker Plus tier qualifications for that month because they are
unable to hit the tiers as easily. For example, the Exchange observed a
decrease in Market Maker Plus program participation concurrent with
increased volatility in August 2019. In particular, in July 2019,
around 41% of the total number of ISE Market Makers had qualified for
Market Maker Plus Tier 2 in any Select Symbol. In August 2019, the
Exchange saw this percentage drop to less than 30%. Had the proposed
changes been in place for August 2019, around 47% of all ISE Market
Makers would have qualified for Tier 2 using the 6-month look-back
period. Given the foregoing, the Exchange seeks to avoid penalizing
Market Makers that have historically been strong participants in the
Exchange's Market Maker Plus program by easing the burden on these
Market Makers to maintain their Market Maker Plus qualification.
The Exchange believes that the proposed ``lookback'' period of at
least four out of the previous six months is an appropriate measure of
strong past performance in the Market Maker Plus program as it requires
Market Makers to meet the stringent requirements of Market Maker Plus
Tier 2 or higher for a significant period of time in order to receive
the reduced rebates.\15\ Furthermore, the Market Maker would also need
to meet the rigorous Tier 2 qualifications each month going forward to
maintain the four month cushion in order to glean the proposed rebate
benefits. The Exchange also believes the proposed reduction of the
applicable Tier 2 rebate by $0.08 per contract \16\ is set at an
appropriate level that is lower than any Market Maker Plus tiered
rebate that a Market Maker would normally receive while still providing
enough of a cushion that avoids penalizing historically strong Market
Maker Plus program participants.
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\15\ See supra note 10.
\16\ Thus, with the proposed changes, the reduced rebate would
be $0.10 per contract for the regular maker rebate (i.e., the $0.18
per contract regular Tier 2 maker rebate reduced by $0.08 per
contract), and $0.07 per contract for the linked maker rebate (i.e.,
the $0.15 per contract linked Tier 2 maker rebate reduced by $0.08
per contract).
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Accordingly, the Exchange believes that its proposal is reasonable
and equitable because the modified criteria will continue to require
Market Makers to quote significantly at the NBBO, thereby continuing to
contribute to market quality in a meaningful way. In fact, with the
proposed changes, the Exchange will fortify participation in the Market
Maker Plus program by helping ensure that historically strong program
participants continue to participate and qualify as Market Maker Plus,
which will further improve market quality.
The Exchange believes that the proposed changes to the
qualifications to Market Maker Plus are not unfairly discriminatory as
all Market Makers will be subject to the same qualification criteria
for Market Maker Plus. The Exchange also continues to believe that it
is not unfairly discriminatory to offer rebates under this program to
only Market Makers. Market Makers, and in particular, those Market
Makers that participate in the Market Maker Plus Program and achieve
Market Maker Plus status, add value through continuous quoting and are
subject to additional requirements and obligations (such as quoting
obligations) that other market participants are not. Finally, the
Exchange believes that the proposed changes will continue to encourage
Market Makers to post tight markets in Select Symbols, thereby
increasing liquidity and attracting additional order flow to the
Exchange, which benefits all market participants in the quality of
order interaction.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Intra-Market Competition
The proposed amendments to the Exchange's Market Maker Plus program
described above do not impose an undue burden on intra-market
competition. While the proposal would apply directly to those Market
Makers that achieve the Market Maker Plus Tier 2 standards described
above, the Exchange believes that the proposed changes will fortify and
encourage participation in the Market Maker Plus program, ultimately to
the benefit of all market participants. As discussed
[[Page 57911]]
above, the Exchange believes that the proposed changes will continue to
encourage all Market Makers to improve market quality by providing
significant quoting at the NBBO in Select Symbols, which in turn
improves trading conditions for all market participants through
narrower bid-ask spreads and increased depth of liquidity available at
the inside market, thereby attracting additional order flow to the
Exchange. For these reasons, the Exchange does not believe that its
proposal will place any category of Exchange market participant at a
competitive disadvantage.
Inter-Market Competition
The proposed changes are designed to ensure that the goals of the
Exchange's Market Maker Plus program are furthered by fortifying
participation in the program and to avoid penalizing Market Makers that
have historically made quality markets in Select Symbols for a
significant amount of time. The Exchange operates in a highly
competitive market in which market participants can readily favor
competing venues if they deem fee levels at a particular venue to be
excessive, or rebate opportunities available at other venues to be more
favorable. In such an environment, the Exchange must continually adjust
its fees and rebates to remain competitive. Because competitors are
free to modify their own fees in response, and because market
participants may readily adjust their order routing practices, the
Exchange believes that the degree to which fee changes in this market
may impose any burden on competition is extremely limited. Moreover, as
noted above, price competition between exchanges is fierce, with
liquidity and market share moving freely between exchanges in reaction
to fee and rebate changes. In sum, if the changes proposed herein are
unattractive to market participants, it is likely that the Exchange
will lose market share as a result. Accordingly, the Exchange does not
believe that the proposed changes will impair the ability of members or
competing order execution venues to maintain their competitive standing
in the financial markets.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \17\ and paragraph (f)(2) of Rule 19b-4
thereunder.\18\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ISE-2019-26 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2019-26. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-ISE-2019-26 and should be submitted on
or before November 19, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-23547 Filed 10-28-19; 8:45 am]
BILLING CODE 8011-01-P