[Federal Register Volume 83, Number 131 (Monday, July 9, 2018)]
[Notices]
[Pages 31783-31800]
[FR Doc No: 2018-14544]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83576; File No. SR-ISE-2018-56]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
of Proposed Rule Change To Amend Its Rules Related to Complex Orders

July 2, 2018.
    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 June 22, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II, below, which Items have
been prepared by the Exchange. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
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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 its rules related to Complex Orders.
    The text of the proposed rule change is available on the Exchange's
website at http://ise.cchwallstreet.com/, at the principal office of
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange first adopted Rule 722 for complex orders in October
2001 and has amended and expanded Rule 722 and other Exchange rules to
provide for the handling of complex orders over the years. Although the
Exchange has always handled complex orders on an automated basis, the
Exchange's rules related to complex orders have largely remained
principle based. As a result, the Exchange's rules do not fully
describe how complex orders are processed in the level of detail that
is now the standard for automated exchanges. Accordingly, the Exchange
believes it is necessary and appropriate to revise its rules related to
complex orders to provide greater clarity regarding how complex orders
are processed on the Exchange. In this respect, the proposed rule
change consolidates within Rule 722 provisions that have been added to
various other Exchange rules over the years and adds cross references
within Rule 722 to other applicable rules to provide a single point of
reference for how complex orders are handled on the Exchange. The
proposal also expands upon and clarifies various existing provisions,
and provides greater detail regarding complex order types, the
application of Exchange rules regarding internalization, and complex
order crossing transactions. Furthermore, the proposal also adds
provisions related to the exposure of complex orders for price
improvement and the process for opening complex strategies. The
Exchange notes that it is simply including additional detail in its
rules on the existing process. No changes to the process are being
contemplated by this rule change filing.
Definitions
    The Exchange proposes to amend Rule 722(a) to adopt the terms
``Complex Options Strategy'' for complex strategies that have only
options components, ``Stock-Option Strategy'' for complex strategies
that have a stock component and a single options component, and
``Stock-Complex Strategy'' for complex strategies that have a stock
component and multiple options components. The proposed definitions
would also include language that explains that only those Complex
Options Strategies and Stock-Complex Strategies with no more than the
applicable number of legs are eligible for processing.\3\ The
applicable number of legs will be determined by the Exchange on a
class-by-class basis independently for Complex Options Strategies and
Stock-Complex Strategies.\4\ In addition, the Exchange proposes to
adopt separate definitions for the terms ``Complex Options Order,''
``Stock-Option Order,'' and ``Stock-Complex Order,'' which refer to
orders for a Complex Options Strategy, Stock-Option Strategy, and
Stock-Complex Strategy, respectively. Finally, the Exchange proposes to
state that the term ``Complex Order'' includes Complex Options Orders,
Stock-Option Orders, and Stock-Complex Orders. Currently, Rule 722(a)
does not contain a definition of complex strategies (as opposed to
orders) and refers to options only complex orders as ``complex orders''
and separately defines ``stock-option orders.'' As a result, it may not
be clear under the current definitions whether references in the rules
to ``complex orders'' apply to stock-option orders, or whether
references are to orders or to the complex instrument. Under the
proposal, the term ``complex strategy'' is used to refer to Complex
Options Strategies, Stock-Option Strategies and Stock-Complex
Strategies. Accordingly, this proposed change will bring clarity to the
Exchange's rules with respect to whether certain provisions apply only
to Complex Options Strategies, only to Stock-Options Strategies, only
to Stock-Complex Strategies or to all three. In this respect, the
Exchange has reviewed all of its rules related to the handling of
complex strategies to apply the newly defined terms appropriately.\5\
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    \3\ By definition, Stock-Option Strategies will have only one
option leg and one stock leg.
    \4\ Currently, the Exchange accepts Complex Options Strategies
with up to 10 options legs, and Stock-Option Strategies and Stock-
Complex Strategies with up to 9 options legs in addition to one
stock leg. Chicago Board Options Exchange (``CBOE'') Rule
6.53C(a)(1)-(2) provides similar flexibility in determining the
maximum number of legs. The Exchange will inform members of any
change to the number of legs accepted via Options Trader Alert.
    \5\ As discussed more fully later in the filing, the Exchange
proposes to substitute the term ``complex order'' with ``Complex
Options Order'' in Rule 715(k) and current Rule 722(b)(3)(ii) to
clarify that legging orders are not created for Stock-Options Orders
and Stock-Complex Orders, and in current Supplementary Material .04
to Rule 722 to clarify that market maker spread quotation adjustment
functionality applies only to Complex Option Order strategies. The
Exchange also proposes to amend the use of the term ``complex
order'' in current Rule 722(b)(1) to clarify the increments for
Complex Options Orders, Stock-Option Orders and Stock-Complex
Orders, and in current Rule 722(b)(2) to clarify the applicable
priority rules for Complex Options Orders, Stock-Option Orders and
Stock-Complex Orders.
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    The Exchange also proposes to delete from Rule 722 the definition
of SSF-option order, which is a complex order that has a single stock
future component, and to delete Supplementary Material .01 to Rule 722
regarding entry and execution of SSF-option orders. Certain aspects of
Supplementary Material .01 to Rule 722 also relate to Stock-Option
Orders and Stock-Complex Orders. These parts of the rule contain
outdated language that is not relevant to the trading of automated
Stock-Option Orders and Stock-Complex Orders where all components are
traded through the Exchange at a single net price. The Exchange
therefore proposes to delete these parts of the rule as well. The
Exchange provided for the potential to handle SSF-option orders in
anticipation of the launch of exchange-traded single stock futures in
2002. However, the single stock future product has not gained
sufficient popularity among investors to support a SSF-option product,
and the Exchange has never received a SSF-option order. Therefore, the
Exchange proposes to remove the order type from its rules. The Exchange
will file a proposal with the Commission should it determine to offer
SSF-option orders in the future.
Order Types
    The Exchange proposes to delete current paragraph 722(b)(4) and add
new paragraph 722(b), which specifies which of the order types
contained in Rule 715 apply to complex orders and identifies any unique
aspects with

respect to complex orders. All orders and designations the Exchange
proposes to codify in Rule 722(b) for complex orders are currently
available in the complex order book and are based on order types and
designations currently provided in ISE Rule 715 for regular orders. The
Exchange also proposes to specify that members may designate complex
orders for participation in the complex order exposure process
discussed below (i.e., ``Exposure Orders'' and ``Exposure Only
Orders'').
    Specifically, the proposed rule provides that, unless otherwise
specified, the definitions used in paragraph 722(b) have the same
meaning contained in Rule 715 and that complex orders may be entered
using the orders and designations provided in paragraph 722(b). The
orders and designations identified in the proposed rule are: \6\
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    \6\ In connection with this change, Exchange [sic] proposes to
use these definitions where applicable in Rule 722 (i.e., the
complex order rule) and certain other rules that specify application
to particular complex order types (e.g., Rule 702(d)(2)).
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    (1) Market Complex Order. A Market Complex Order is a Complex Order
to buy or sell a complex strategy that is to be executed at the best
price obtainable. If not executable upon entry, such orders will rest
on the complex order book unless designated as fill-or-kill or
immediate-or-cancel.
    (2) Limit Complex Order. A Limit Complex Order is a Complex Order
to buy or sell a complex strategy that is entered with a limit price
expressed as a net purchase or sale price for the components of the
order.
    (3) All-Or-None Complex Order. A Complex Order may be designated as
an All-or-None Order that is to be executed in its entirety or not at
all. An All-Or-None Order may only be entered as an Immediate-or-Cancel
Order.
    (4) Reserve Complex Order. A Limit Complex Order may be designated
as a Reserve Order that contains both a displayed portion and a non-
displayed portion.
    (i) Both the displayed and non-displayed portions of a Reserve
Complex Order are available for potential execution against incoming
marketable orders or quotes. A non-marketable Reserve Complex Order
will rest on the complex order book.
    (ii) The displayed portion of a Reserve Complex Order shall be
ranked at the specified limit price and the time of order entry.
    (iii) The displayed portion of a Reserve Complex Order will trade
in accordance with Rule 722(d).
    (iv) When the displayed portion of a Reserve Complex Order is
decremented, either in full or in part, it shall be refreshed from the
non-displayed portion of the resting Reserve Complex Order. If the
displayed portion is refreshed in part, the new displayed portion shall
include the previously displayed portion. Upon any refresh, the entire
displayed portion shall be ranked at the specified limit price and
obtain a new time stamp, i.e., the time that the new displayed portion
of the order was refreshed. The new displayed portion will trade in
accordance with Rule 722(d).
    (v) The initial non-displayed portion of a Reserve Complex Order
rests on the complex order book and is ranked based on the specified
limit price and time of order entry. Thereafter, non-displayed
portions, if any, always obtain the same time stamp as that of the new
displayed portion in subparagraph (iv) above. The non-displayed portion
of any Reserve Complex Order is available for execution only after all
displayed interest on the complex order book has been executed.\7\
Thereafter, the non-displayed portion of any Reserve Complex Order will
trade in accordance with Rule 722(d).
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    \7\ The non-displayed portion of a Reserve Complex Order is
available for execution after displayed interest on the complex
order book but prior to interest on the regular order book. Under
the Exchange's current priority rules, at each price, executable
interest on the complex order book has priority over bids and offers
for the individual options legs. See Rule 722(b)(2) (renumbered to
Rule 722(c)(2)). These rules will remain in the proposed rules with
only non-substantive changes that do impact the priority given to
Complex Orders (including Reserve Complex Orders) entered on the
Exchange. During the last three months, non-displayed Complex
Reserve Order interest made up a very small fraction (0.28%) of the
total volume executed on the Exchange. In addition, the vast
majority (82%) of that non-displayed interest was for the account of
a Priority Customer. Institutional customers in particular use
Reserve Complex Orders to represent the full size of their interest
on the complex order book while mitigating information leakage by
displaying only a portion of such interest to the market. While the
Exchange typically prioritizes displayed interest over non-displayed
interest on the same order book, the Exchange believes that it is
important to allow these participants to source ample liquidity on
the complex order book by continuing to execute the non-displayed
portion of their Reserve Complex Orders prior to any interest on the
regular order book. Furthermore, because the current rules already
prioritize Priority Customer orders notwithstanding the general
principle that Complex Orders have priority ahead of the regular
order book, the Exchange believes that this priority scheme
appropriately incentivizes Complex Order interest while maintaining
priority of customer orders in the regular market. See Securities
and Exchange Act Release No. 44955 (October 18, 2001), 66 FR 53819
(October 24, 2001) (Complex Order Priority Approval Order).
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    (vi) Only the displayed portion of a Reserve Complex Order is
eligible to be exposed for price improvement pursuant to Rule 722(d)(1)
and Supplementary Material .01 to this Rule 722.
    (5) Attributable Complex Order. A Market or Limit Complex Order may
be designated as an Attributable Order as provided in Rule 715(h).
    (6) Customer Cross Complex Order. A Customer Cross Complex Order is
comprised of a Priority Customer Complex Order to buy and a Priority
Customer Complex Order to sell at the same price and for the same
quantity. Such orders will trade in accordance with Supplementary
Material .08(d) to this Rule 722.
    (7) Qualified Contingent Cross Complex Order. A Complex Options
Order may be entered as a Qualified Contingent Cross Order, as defined
in Rule 715(j). Qualified Contingent Cross Complex Orders will trade in
accordance with Supplementary Material .08(e) to this Rule 722.
    (8) Day Complex Order. A Complex Order may be designated as a Day
Order that if not executed, expires at the end of the day on which it
was entered.
    (9) Fill-or-Kill Complex Orders. A Complex Order may be designated
as a Fill-or-Kill Order that is to be executed in its entirety as soon
as it is received and, if not so executed, cancelled.
    (10) Immediate-or-Cancel Complex Orders. A Complex Order may be
designated as an Immediate-or-Cancel Order that is to be executed in
whole or in part upon receipt. Any portion not so executed is
cancelled.
    (11) Opening Only Complex Order. An Opening Only Complex Order is a
Limit Complex Order that may be entered for execution during the
Complex Opening Process described in Supplementary Material .10 to Rule
722. Any portion of the order that is not executed during the Complex
Opening Process is cancelled.
    (12) Good-Till-Date Complex Order. A Good-Till-Date Complex Order
is an order to buy or sell which, if not executed, will be cancelled at
the sooner of the end of the expiration date assigned to the Complex
Order, or the expiration of any individual series comprising the order.
    (13) Good-Till-Cancel Complex Order. A Good-Till-Cancel Complex
Order is an order to buy or sell that remains in force until the order
is filled, canceled or any series of the order expires; provided,
however, that a Good-Till-Cancel Complex Order will be cancelled in the
event of a corporate action that results in an adjustment to the terms
of any series underlying the Complex Order.
    (14) Exposure Complex Order. An Exposure Complex Order is an order

that will be exposed upon entry as provided in Supplementary Material
.01 to this Rule 722 if eligible, or entered on the complex order book
if not eligible. Any unexecuted balance of an Exposure Complex Order
remaining upon the completion of the exposure process will be entered
on the complex order book.
    (15) Exposure Only Complex Order. An Exposure Only Complex Order is
an order that will be exposed upon entry as provided in Supplementary
Material .01 to this Rule 722 if eligible, or cancelled if not
eligible. Any unexecuted balance of an Exposure Only Complex Order
remaining upon the completion of the exposure process will be
cancelled.
    (16) Complex QCC with Stock Orders. A Complex QCC with Stock Order
is a Qualified Contingent Cross Complex Order, as defined in Rule
722(b)(7), entered with a stock component to be communicated to a
designated broker-dealer for execution pursuant to Supplementary
Material .08(f) to Rule 722.
Legging Orders
    Separately, Rule 715(k) contains a definition of legging orders,
which are orders that represent a Complex Options Order on the regular
order book. A ``legging order'' is defined as a limit order on the
regular limit order book that represents one side of a complex order
that is to buy or sell an equal quantity of two options series resting
on the Exchange's complex order book.\8\ The Exchange proposes to
clarify that legging orders are not created for Stock-Options Orders
and Stock-Complex Orders by stating that a legging order represents one
side of a ``Complex Options Order,'' and by referencing Complex Options
Orders in other parts of the rule. The Exchange also proposes to
indicate that a legging order is only generated from the displayed
portion of a Complex Options order that is designated as a Reserve
Complex Order. The non-displayed portion of such orders are not
eligible to create legging orders as generation of a legging order
would indicate to market participants that there is additional
undisplayed size on the complex order book even though the member
entering such Reserve Complex Order has determined not to display that
interest.
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    \8\ Legging orders are firm orders that are included in the
Exchange's displayed best bid or offer, and are disseminated over
OPRA and the Nasdaq ISE Top Quote Feed. Legging orders are not
disseminated over the Nasdaq ISE Order Feed since these orders
represent a component leg of Complex Options Orders entered on the
complex order book that have already been disseminated over the
Nasdaq ISE Spread Feed.
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Trading Increments
    Currently, Rule 722 specifies that complex orders may be expressed
in any decimal price, and that the legs of a complex order may be
executed in one cent increments, regardless of the minimum increments
otherwise applicable to the individual options legs of the order. The
current language in the current Rule 722(b)(1) (renumbered Rule
722(c)(1) under the proposal), which mirrors the rules of other options
exchanges,\9\ reflects a combination of the increments applicable to
Complex Options Strategies, Stock-Options Strategies and Stock-Complex
Strategies. For clarity, the Exchange proposes to amend the Rule to
specify that bids and offers for Complex Options Strategies may be
expressed in one cent ($0.01) increments, and the options legs of
Complex Options Strategies may be executed in one cent ($0.01)
increments, regardless of the minimum increments otherwise applicable
to the individual options legs of the order. The Exchange also proposes
to amend the Rule to specify that bids and offers for Stock-Option
Strategies and Stock-Complex Strategies may be expressed in any decimal
price determined by the Exchange,\10\ and the stock leg of a Stock-
Option Strategy and Stock-Complex Strategy may be executed in any
decimal price permitted in the equity market. Although the Exchange's
current rule states that bids and offers entered on the complex order
book can be entered in ``any decimal increment'' similar to language in
the rules of other options markets,\11\ the Exchange determines
appropriate minimum increments for Stock-Option Strategies and Stock-
Complex Strategies, and will not accept orders or quotes that do not
abide by the selected minimum increment. Smaller minimum increments are
appropriate for complex orders that contain a stock component as the
stock component can trade at finer decimal increments permitted by the
equity market. Furthermore, the Exchange notes that even with the
flexibility provided in the rule, the individual options and stock legs
must trade at increments allowed by the Commission in the options and
equities markets. For clarity, the Exchange further proposes to add
Supplementary Material .04 to Rule 710 (Minimum Trading Increments) to
reference Rule 722 and specify the minimum trading increments
applicable to the options leg(s) of a complex strategy.
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    \9\ See e.g., Commentary .01 to NYSE Amex Rule 980NY.
    \10\ The minimum increment for Stock-Option Strategies and
Stock-Complex Strategies will be communicated to members via Options
Trader Alert.
    \11\ See NYSE Arca Options Commentary .01 to Rule 6.91.
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    Finally, the Exchange proposes to amend Supplementary Material .07
to Rule 722 to reflect the different increments applicable to the
options and stock legs of complex strategies traded on the Exchange. In
particular, the Exchange proposes to amend this rule to state that the
system will reject complex strategies where are [sic] legs are to buy
if entered at a price that is less than the minimum net price, which is
calculated as the sum of the ratio on each leg of the complex strategy
multiplied by the minimum increment applicable to that leg pursuant to
Rule 722(c)(1). Currently, this rule states that the minimum price is
calculated by multiplying the sum of the ratio on each leg by $0.01 per
leg (i.e., the minimum increment for options legs). While this
calculation is accurate for Complex Options Strategies, it does not
reflect the treatment of Stock-Option Strategies or Stock-Complex
Strategies where the stock leg(s) can be entered in any decimal price
determined by the Exchange. For example, an order to buy a share of
stock and two call options would have a minimum price of $0.0201--i.e.,
$0.02 for two options legs and $0.0001 for the stock leg.
Complex Order Priority
    The Exchange proposes to make minor non-substantive changes to the
existing text of current Rule 722(b)(2) (renumbered Rule 722(c)(2)
under the proposal) for clarity. Rule 722(b)(2) provides that the legs
of a complex strategy with multiple options legs (i.e., Complex Options
Strategies and the options legs of Stock-Complex Strategies where there
are more than one options component) may not be executed at worse
prices than are available on the Exchange for the individual series,
but may be executed at the same price as bids and offers on the
Exchange for the individual series so long as there are no Priority
Customer Orders on the Exchange at those prices (provided however that
for complex strategy with multiple options legs, if one of the options
legs improves upon the best price available on the Exchange then the
other leg is permitted to trade at the same price as a Priority
Customer).\12\ Rule 722(b)(2) further provides that the option leg of a
Stock-Option Strategy

may be executed at the same price as bids and offers on the Exchange
for the individual series but not at the same price as Priority
Customer Orders for the individual series. For clarity, the Exchange
proposes to re-format Rule 722(b)(2) into three paragraphs and to
replace certain cross references with the defined terms ``Complex
Options Strategy,'' ``Stock-Options Strategy'' and ``Stock-Complex
Strategy'' discussed above. The Exchange also proposes to replace
references to bids and offers established ``in the marketplace'' with
``on the Exchange'' as the reference to ``in the marketplace'' may
create confusion as to whether ``marketplace'' refers to the Exchange
or the broader market. The Exchange also proposes to delete references
to SSF-option orders in the text of current Rule 722(b)(2), and to
delete related Supplementary Material .01 to Rule 722. As discussed
above, the Exchange is proposing to remove all references to SSF-option
orders from the Rules. Furthermore, with the proposed elimination of
this type of complex strategy from the rulebook, Supplementary Material
.01 to Rule 722 is no longer necessary as it contains requirements
related to the execution of SSF-option orders, as well as outdated
language that no longer applies to the automated execution of complex
strategies that contain a stock component. Finally, the Exchange
proposes in Proposed Rule 722(c)(2)(iv) to add a new reference to the
treatment of Reserve Orders that clarifies that a complex strategy may
be executed at a net credit or debit price with one other Member
without giving priority to the non-displayed portion of Reserve Orders
on the bids or offers on the Exchange for the individual legs of the
complex strategy. The non-displayed portion of a Reserve Order has no
priority on the book because it is hidden from other market
participants, and is therefore only available for execution after all
displayed interest has been executed.\13\ Furthermore, to the extent
that members entering orders in the regular market wish to have their
orders protected they can use a number of order types that are
displayed to the market and therefore retain their regular priority on
the order book. Thus, complex strategies may be executed without giving
priority to the non-displayed portion of such interest in the regular
market. While this is consistent with the general treatment of non-
displayed interest in the regular market, the Exchange believes that it
is important to add this reference here for additional clarity.
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    \12\ Pursuant to ISE Rule 100(a)(49) and (50), a Priority
Customer Order is an order for the account of 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).
    \13\ See Rule 715(g)(5).
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Execution of Orders
    For clarity, the Exchanges proposes to specify that complex
strategies are not executable unless all of the terms of the strategy
can be satisfied and the options legs can be executed at prices that
comply with the provisions of current Rule 722(b)(2) (renumbered Rule
722(c)(2) under the proposal).\14\ The Exchange also proposes to add
new language under proposed Rule 722(d)(4) to clarify that, similar to
treatment of orders in the regular market, complex strategies that are
not executable may rest on the complex order book until they become
executable. Furthermore, the Exchange proposes to amend the text of
current Rule 722(b)(3) (renumbered Rule 722(d) under the proposal) to
more clearly reflect the sequence in which complex strategies are
processed: (i) First complex orders are exposed for price improvement
(if eligible) for a period of up to one second (quotes in complex
strategies are not eligible for exposure),\15\ (ii) then complex
strategies are matched against other interest in the complex order book
if possible,\16\ and (iii) then complex strategies are executed against
bids and offers on the Exchange for the individual series if
possible.\17\ Furthermore, as clarification, the amended Rule 722(d)(2)
will explicitly reference that complex strategies will be executed at
the best net price available from executable Complex Orders and quotes
on the complex order book, and bids and offers for the individual
options series. Certain complex strategies are not available to leg in
to the regular market; \18\ complex orders for those strategies remain
eligible for the complex order exposure process, and may also trade
with other interest on the complex order book in accordance with the
terms of the complex order. Finally, the Exchange proposes to add
reference to ``executable'' complex strategies throughout this section
to re-enforce that complex strategies cannot be executed unless the
restrictions of current Rule 722(b)(2) (renumbered Rule 722(c)(2) under
the proposal) are satisfied.\19\
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    \14\ For example, assume the ISE BBO for series A is $1.00 x
$1.10 and the ISE BBO for series B is $0.95 x $1.05. A resting
Complex Order to sell series A and sell series B at a net price of
$2.16 is not executable because one of the legs of the complex order
would need to be executed at a price that is above the best offer
available for the individual series (i.e., $1.10 for series A and
$1.06 for series B; or $1.11 for series A and $1.05 for series B).
Nor would such a complex order be executable at a net price of $2.15
if there were Priority Customer orders on the Exchange to sell
series A and/or series B at the ISE best offer; however, assuming
the individual legs trade in penny increments, the complex order
would be executable at a price of $2.14 pursuant to Rule 722(c)(2).
    \15\ Although quotes in complex strategies are not eligible for
exposure pursuant to Supplementary Material .01 to Rule 722, the
Exchange notes that market makers that have interest that they wish
to go through the exposure process have the option of submitting
complex orders instead of quotes to be exposed.
    \16\ As described in proposed language being added to
Supplementary Material .02 to Rule 722, the full size of Stock-
Option Orders and Stock-Complex Orders that are being processed by
the stock execution venue pursuant to Supplementary Material .02 to
Rule 722 will be unavailable for trading while the order is being
processed. For example, if a Stock-Option Order to buy 100 contracts
at a net price of $1.00 is matched with a sell order for 20
contracts in the same complex strategy, the whole 100 contract
Stock-Option Order will be unavailable for trading with other
interest while the stock portion of the order is being processed for
potential execution by the stock execution venue.
    \17\ The Exchange proposes to move the sub-paragraph regarding
order exposure from current Rule 722(b)(3)(iii) to proposed Rule
722(d)(1) (and Supplementary Material .01 to Rule 722) so that the
rule more clearly indicates that eligible orders are exposed before
they are matched against other interest in the complex order book.
The Exchange also proposes to add text to current Rule 722(b)(3)(ii)
(renumbered to be Rule 722(d)(3) under the proposal) to expressly
state that if there are no executable contra-side complex orders on
the complex order book, executable Complex Options Orders and the
options legs of a Stock-Option Order or Stock-Complex Order (up to a
maximum number of options legs) may be executed against bids and
offers on the Exchange for the individual options legs if possible.
The Exchange will continue to manage and curtail attempts to trade
against the individual options legs so as to not negatively impact
system capacity and performance. See Securities Exchange Act Release
No. 66234 (January 24, 2012), 77 FR 4852 (January 31, 2012) (SR-ISE-
2011-82) (Approval Order). The Exchange will curtail the number of
legging orders on an objective basis, such as limiting the number of
orders generated in a particular class. The Exchange will not limit
the generation of legging orders on the basis of the entering
participant or the participant category of the order (e.g., Priority
Customer, Professional Order, etc.). See id.
    \18\ See Rule 722(b)(3)(ii) (renumbered Rule 722(d)(3)); see
also Securities Exchange Act Release No. 74004 (January 6, 2015), 80
FR 1565 (January 12, 2015) (SR-ISE-2014-56).
    \19\ The Exchange proposes to add clarifying language to
proposed Rule 722(d)(3) to separately identify that Complex Options
Orders and the options legs of a Stock-Option Order or Stock-Complex
Order (up to a maximum number of legs) may be executed against bids
and offers on the Exchange for the individual options series. This
change is consistent with the proposal to clarify the complex order
definitions as discussed in supra note 5 and accompanying text.
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Incoming Complex Order Exposure Process
    The Exchange proposes to amend Rule 722 with respect to the
exposure of complex orders upon entry. Rule 722 currently provides that
members can choose to have complex orders that are marketable upon
entry exposed for up to one second before being automatically executed.
Similar to rules adopted by other options exchanges that trade

complex orders,\20\ the proposal will amend the rule to provide for an
auction process. Specifically, the proposed rules would describe an
auction process whereby complex orders that improve upon the best price
for the same complex strategy on the complex order book upon entry may
be exposed for up to one second, as described in more detail in the
following paragraphs.\21\
---------------------------------------------------------------------------

    \20\ See Phlx Rule 1098(e); EDGX Rule 21.20(d); CBOE Rule
6.53(d), each of which describe different processes for auctioning
complex orders entered on those markets.
    \21\ A complex order improves upon the best price for the same
complex strategy on the complex order book if it is a limit order to
buy priced higher than the best bid, a limit order to sell priced
lower than the best offer, or a market order to buy or sell.
---------------------------------------------------------------------------

    Proposed Supplementary Material .01 to Rule 722 \22\ specifies that
upon entry of an eligible complex order designated for exposure, a
broadcast message containing the details of the complex order (i.e.,
net price or at market, size, and side) is sent to all members,\23\ who
are then given up to one second to enter responses with the prices and
sizes at which they are willing to participate in the execution of the
complex order. The proposed rule change also specifies that such
responses are only executable against the Complex Order with respect to
which they are entered,\24\ can be modified or withdrawn at any time
prior to the end of the exposure period, and will be considered up to
the size of the Complex Order being exposed. During the exposure
period, the Exchange will broadcast the best Response price and the
aggregate size of Responses available at that price.
---------------------------------------------------------------------------

    \22\ As proposed, the complex order exposure process will be
described in Supplementary Material .01 to Rule 722. The Exchange
therefore proposes to amend rules that cite to this process (e.g.,
Rule 722(d)(2)) to point to this rule instead of Rule
722(b)(3)(iii).
    \23\ Prices for complex orders are not eligible to be reported
to the Options Price Reporting Authority (``OPRA'') for inclusion in
consolidated quotation data but trade prices on the individual legs
are reported to OPRA as a part of last sale data with an identifier
noting that the trade was part of a complex transaction.
Accordingly, the Exchange does not provide information regarding the
complex orders being exposed and responses entered during the
process to OPRA. Instead, a broadcast message is sent to subscribers
of the Exchange's order feed. The Exchange notes that it previously
operated another auction mechanism, namely the Price Improvement
Mechanism, without blind responses. See Securities Exchange Act
Release No. 50819 (December 8, 2004), 69 FR 75093 (December 15,
2004) (SR-ISE-2003-06).
    \24\ At the conclusion of the exposure period, any unexecuted
balance of a Response is automatically cancelled. In addition, since
any Responses are only available to trade against the order being
exposed, only contra-side Responses are eligible to be executed in
an exposure auction.
---------------------------------------------------------------------------

    In addition, the proposed rule change specifies that the exposure
period is automatically terminated due to the receipt of certain
unrelated complex orders for the same complex order strategy,\25\ or if
a trading halt is initiated during the exposure period.\26\ At the end
of the exposure period complex orders are automatically executed to the
greatest extent possible pursuant to Rule 722(d)(2)-(3) taking into
consideration (i) bids and offers on the complex order book, (ii) bids
and offers on the Exchange for the individual options series, and (iii)
Responses received during the exposure period, provided that when
allocating pursuant to 722(d)(2)(ii), Responses are allocated pro-rata
based on size.\27\ Thereafter, any unexecuted balance of the complex
order at the end of the exposure period is placed on the complex order
book.
---------------------------------------------------------------------------

    \25\ The exposure period will end immediately upon: (i) The
receipt of a Complex Order or quote for the same complex strategy on
either side of the market that is marketable against the complex
order book or bids and offers for the individual legs; or (ii) the
receipt of a non-marketable Complex Order or quote for the same
complex strategy on the same side of the market that would cause the
price of the exposed Complex Order to be outside of the best bid or
offer for the same complex strategy on the complex order book.
    \26\ If a trading halt is initiated during the exposure period,
the Complex Order exposure process will be automatically terminated
without execution.
    \27\ Pursuant to Rule 722(d)(2), complex orders are executed
against bids and offers on the complex order book in price priority.
The Exchange designates on a class-by-class basis whether bids and
offers at the same price on the complex order book are executed: (i)
In time priority; or (ii) pursuant to an algorithm whereby priority
customers are given priority and professional orders and market
maker quotes are executed pro-rata based on size after certain
allocation preferences are satisfied; or (iii) pro-rata based on
size (i.e., without any special priority for Priority Customer
Orders or allocation preferences). Pursuant to Rule 722(d)(3),
complex order are also automatically executed against bids and
offers on the Exchange for the individual legs of the complex order
if possible.
---------------------------------------------------------------------------

    An Exposure Only Order, on the other hand, is a complex order that
will be exposed upon entry as provided in Supplementary Material .01 to
Rule 722 if eligible, but is cancelled if not eligible. Any unexecuted
balance of an eligible Exposure Only Order upon the completion of the
exposure process is also cancelled. Similar to Immediate-or-Cancel
Orders, the Exposure Only order type is designed to assist members in
achieving a speedy execution by exposing eligible Complex Orders to
potential price improvement before cancelling any unexecuted balance.
Example:
Suppose the following market in complex strategy ABC:
ISE Complex BBO: 10 @1.00 x 10 @ 1.05
An Exposure Only Order is entered to buy 20 @ 1.03: [sic]

A broadcast message is sent announcing the start of an exposure
auction. During the exposure period, the following responses are
received:
Response 1: Sell 10 @ 1.03
Response 2: Sell 5 @ 1.02

At the end of the exposure period, the Exposure Only Order trades
against:
Response 2: 5 @ 1.02
Response 1: 10 @ 1.03

The remaining quantity of 5 contracts is then cancelled.
Market Maker Quotes
    Supplementary Material .03 to Rule 722, which is currently subject
to delayed implementation in conjunction with the Exchange's recent
transition to the Nasdaq INET platform as described in the rule,
provides that Market makers may enter quotes on the complex order book
in their appointed options classes. Prior to the INET transition,
quoting in the complex order book was available in a subset of the
options classes. The Exchange therefore proposes to amend Supplementary
Material .03 to Rule 722 to clarify that complex quoting will only be
available in options classes selected by the Exchange and announced to
members via Options Trader Alert.\28\ In addition, market makers that
quote in the complex order book must enter certain risk parameters
pursuant to Supplementary Material .04 to Rule 722 (``Market Maker
Speed Bump''). In connection with changes described in the
``Definitions'' section above, the Exchange proposes to amend
Supplementary Material .04 to Rule 722 to clarify that the Market Maker
Speed Bump applies to Complex Options Strategies and not to Stock-
Option Strategies or Stock-Complex Strategies.
---------------------------------------------------------------------------

    \28\ Market makers that wish to trade in complex strategies
where quoting is not available may do so by entering Complex Orders.
Market makers are not prohibited from entering Complex Orders in any
options classes. See Rule 805.
---------------------------------------------------------------------------

Internalization and Crossing
    The Exchange proposes to add text to Rule 722 to provide clarity
regarding the application of Rule 717(d) and (e) (regarding
facilitation and solicitation), Rule 716 (regarding the Facilitation
and Solicited Order Mechanisms), Rule 721 (regarding crossing orders),
and Rule 723 (regarding the Price Improvement Mechanism) to complex
orders.\29\ In this respect, the Exchange proposes to re-organize and
clarify certain existing rule text, and to add additional provision
[sic] into Rule 722 and proposed Supplementary Material .08 thereto.
---------------------------------------------------------------------------

    \29\ With the addition of language on complex auctions in Rule
722, the Exchange also proposes to delete the current language
addressing these auctions in Rules 716 and 723.
---------------------------------------------------------------------------

    Rule 717(d) requires members to expose orders they represent as
agent to other market participants before they execute them as
principal, and Rule

717(e) requires members to expose orders they represent as agent to
other market participants before they execute them against orders that
they solicit from other members of the Exchange or non-member broker-
dealers. Rule 717(d) and (e) provide a number of ways in which members
may comply with this exposure requirement: (i) Members can expose
orders on the Exchange for at least one second (i.e., entering them on
the limit order book and waiting at least one second before entering a
contra-side proprietary or solicited order), or (ii) members can enter
the orders into one of the specified crossing mechanisms.\30\ The
purpose of this Rule is to assure that all market participants have
adequate opportunity to trade with orders executed on the Exchange and
to provide an opportunity for price improvement through the various
crossing mechanisms. The Exchange has consistently applied the exposure
requirement contained in Rule 717(d) and (e) to the execution of
complex orders on the complex order book,\31\ and has provided for the
execution of complex orders using the specified mechanisms.\32\
---------------------------------------------------------------------------

    \30\ Rule 717(d) also specifies that the exposure requirement is
satisfied if the member was already bidding or offering on the
Exchange for at least one second prior to receiving an agency order
that is executable against such bid or offer.
    \31\ See, e.g., Securities Exchange Act Release No. 57706 (April
24, 2008), 73 FR 23517 (April 30, 2008) (SR-ISE-2007-77).
    \32\ ISE Rule 716, Supplementary Material .08 (regarding
Facilitation and Solicited Order Mechanisms); and ISE Rule 723
Supplementary Material .10 (regarding Price Improvement Mechanism).
---------------------------------------------------------------------------

    For clarity, the Exchange proposes to specify in Rule 722 that the
requirements of Rule 717(d) and (e) apply to the execution of Complex
Orders. In particular, the Exchange proposes to specify that Complex
Orders represented as agent may be executed (i) as principal as
provided in Rule 717(d), or against orders solicited from members and
non-member broker-dealers as provided in Rule 717(e). The exposure
requirements of Rule 717(d) or (e) must be met on the complex order
book unless the order is executed in one of the mechanisms described in
Supplementary Material .08 to this Rule 722. For example, an Electronic
Access Member would meet its exposure requirement under Rule 717(d)(i)
by exposing the agency order on the complex order book for at least one
(1) second, or could enter the order into one of the Exchange's Complex
Order crossing mechanisms described below.
    The Exchange also proposes to move into Supplementary Material .08
to Rule 722 the rule text regarding the execution of complex orders
using the Facilitation and Solicited Order Mechanisms from Rule 716,
and the rule text regarding the execution of complex orders using the
Price Improvement Mechanism from Rule 723. The Exchange also proposes
to make non-substantive changes to the text to: (i) Re-enforce that
complex orders cannot be executed unless they satisfy the requirements
of current Rule 722(b)(2) (renumbered Rule 722(c)(2) under the
proposal), (ii) clarify that Stock-Options Orders and Stock-Complex
Orders cannot leg-into the market when they are executed using one of
the mechanisms, (iii) specify that each options leg of a complex order
must meet the minimum contract size requirement contained in paragraphs
(d) and (e) of Rule 716, and (iv) add additional detail regarding how
the Exchange processes complex orders entered into these
mechanisms.\33\ These changes reflect the current operation of the
Facilitation Mechanism, Solicited Order Mechanism, and Price
Improvement Mechanism for Complex Orders, and are intended to provide
greater clarity to Members with respect to treatment of their complex
crossing orders. The proposed language also specifies that the
application of current Rule 722(b)(2) (renumbered Rule 722(c)(2) under
the proposal) may prevent the execution of orders entered into a
mechanism, in which case, the transaction will be cancelled.
---------------------------------------------------------------------------

    \33\ With respect to the Complex Facilitation Mechanism, the
entry check pursuant to proposed Supplementary Material .08(a)(1) to
Rule 722 is different for Complex Options Orders and Complex Orders
that have a stock component (i.e., Stock-Option Orders and Stock-
Complex Orders) since Stock-Option Orders and Stock-Complex Orders
entered in the Complex Facilitation Mechanism are not eligible to
trade with bids and offers for the individual legs.
---------------------------------------------------------------------------

    The Exchange also proposes to consolidate certain other provisions
related to the auction mechanisms for Complex Orders and include
relevant information in Rule 722 and the Supplementary Material
thereto. For example, Proposed Supplementary Material .08(g) to Rule
722 contains a reference to the minimum contract threshold for Mini
Options, which merely restates requirements contained in Supplementary
Material .13 to Rule 504. In addition, Proposed Rule 722(c)(3)
reaffirms that the requirements of existing Rules 717(d) (Principal
Transactions) and (e) (Solicitation Orders) apply to Complex Orders
represented as agent, and that the exposure requirements of those rules
must be met on the complex order book unless the order is executed in
one of the mechanisms described in Supplementary Material .08 to this
Rule 722. Although these requirements are located in other parts of the
rulebook, the Exchange believes that including them in Complex Order
rule will reinforce their applicability and aid members in navigating
the Exchange's rulebook.
    The following examples illustrate how complex orders are transacted
in the Exchange's crossing mechanisms and their interaction with
individual bids and offers (while the examples below are for complex
orders entered into the Facilitation Mechanism, these orders would
interact similarly with individual bids and offers when entered into
the Solicited Order Mechanism and the Price Improvement Mechanism):
Example 1
Suppose the following market in option class A:
ISE BBO: 10 @1.00 x 10 @1.05

Suppose further the following market in option class B:
ISE BBO: 10 @2.00 x 10 @2.05

A complex order is entered into the Complex Facilitation Mechanism in
the complex order book for a strategy buying 1 option class A and
buying 1 option class B:
Agency Complex Order: Buy 50 @3.05
Contra Side Complex Order: Sell 50 @3.05

A broadcast message is sent announcing the start of the auction. During
the exposure period, the following orders and quotes are received:
Priority Customer 1 Complex Order: Sell 5 @3.05
Non-Customer 1 Complex Response: Sell 50 @3.05
Non-Customer 2 Complex Response: Sell 50 @3.05

At the end of the exposure period, the following orders/responses trade
with the Complex Agency Order:
Priority Customer 1 Complex Order: 5 @ 3.05
Contra Side Complex Order: 20 @ 3.05 (40% of 50) \34\
---------------------------------------------------------------------------

    \34\ Pursuant to the proposed rules, Electronic Access Members
that enter orders into the Facilitation or Price Improvement
Mechanisms may also elect to receive a percentage allocation that is
less than 40%. If the member includes such an instruction, the
contra-side order would receive an allocation consistent with the
percentage requested by the member. To ensure that all members have
an opportunity to trade with the agency order, however, the
allocation received would be limited to a maximum equal to the 40%
allocation ordinarily given to the contra-side order. Furthermore,
the contra-side order would still be responsible for executing up to
the full size of the agency order if there is not enough interest to
execute the agency order at a particular price. Other options
exchanges such as Nasdaq BX, Inc. (``BX'') provide similar
functionality that allows members using an auction mechanism to give
up allocation priority. See e.g., BX Options Rules, Chapter VI, Sec.
9, which provides a similar feature for the BX Options Price
Improvement Auction (``PRISM'').

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

Non-Customer 1 Complex Response: 13 @ 3.05 (Pro-Rata)
Non-Customer 2 Complex Response: 12 @ 3.05 (Pro-Rata)
Example 2:
Suppose the following market in option class A:
ISE BBO: 10 @ 1.00 x 10 @ 1.05

Suppose further the following market in option class B:
ISE BBO: 10 @ 2.00 x 10 @ 2.05

A complex order is entered into the Complex Facilitation Mechanism in
the complex order book for a strategy buying 1 option class A and
buying 1 option class B:
Agency Complex Order: Buy 50 @ 3.05
Contra Side Complex Order: Sell 50 @ 3.05

A broadcast message is sent announcing the start of the auction. During
the exposure period, the following orders and quotes are received:
Priority Customer 1 Complex Order: Sell 5 @ 3.05
Non-Customer 1 Complex Response: Sell 50 @ 3.05
Non-Customer 2 Complex Response: Sell 50 @ 3.05
Priority Customer 2 Regular Order: Sell 5 Option Class A @ 1.02
Priority Customer 3 Regular Order: Sell 5 Option Class B @ 2.03

At the end of the exposure period, the Complex Facilitation transaction
is canceled since a trade at 3.05 with counter side orders/responses
will violate the priority rules for Priority Customer 2 and Priority
Customer 3 Regular Orders.
Example 3
Suppose the following market in option class A:
ISE BBO: 10 @ 1.00 x 10 @ 1.05

Suppose further the following market in option class B:
ISE BBO: 10 @ 2.00 x 10 @ 2.05

A complex order is entered into the Complex Facilitation Mechanism in
the complex order book for a strategy buying 1 option class A and
buying 1 option class B:
Agency Complex Order: Buy 50 @ 3.05
Contra Side Complex Order: Sell 50 @ 3.05

A broadcast message is sent announcing the start of the auction. During
the exposure period, the following orders and quotes are received:
Priority Customer 1 Complex Order: Sell 5 @ 3.05
Non-Customer 1 Complex Response: Sell 50 @ 3.05
Non-Customer 2 Complex Response: Sell 50 @ 3.05
Non-Customer 3 Regular Order: Sell 40 Option Class A @ 1.02
Non-Customer 4 Regular Order: Sell 40 Option Class 5 @ 2.02
Non-Customer 5 Complex Response: Sell 10 @ 3.03

At the end of the exposure period, the following orders/responses trade
with the Complex Agency Order:
Non-Customer 5 Complex Response: Sell 10 @ 3.03
Non-Customer 3 Regular Order: Sell 40 Option Class A @ 1.02
Non-Customer 4 Regular Order: Sell 40 Option Class 5 @ 2.02

In above [sic] example, the response and bids and offers on the
individual legs can provide price improvement for the full size, hence
the Complex Agency Order trades at improved price(s).

    The Exchange also proposes to adopt text in Supplementary Material
.08 to Rule 722 addressing how Customer Cross Orders apply to Complex
Orders. As discussed above, Rule 717(d) and (e) apply when a member
seeks to execute an order it represents as agent against a proprietary
order (i.e., a facilitation transaction) or an order the member has
solicited from another broker-dealer (i.e., a solicited transaction).
Accordingly, transactions where neither side is for the account of a
broker-dealer are not within the scope of Rule 717(d) and (e), and
members can enter the buy and sell orders on the limit order book
nearly simultaneously.\35\ To make the execution of such customer
orders more efficient, the Exchange developed a way to enter opposing
customer orders using a single order type (``Customer Cross
Orders'').\36\ Customer Cross Orders were limited to Priority Customer
Orders in February 2010 after the Exchange adopted this sub-category of
non-broker-dealer investors.\37\
---------------------------------------------------------------------------

    \35\ Supplementary Material .01 to Rule 717 prohibits members
from entering into arrangements designed to circumvent the exposure
require for facilitation transactions. Accordingly, it would be a
violation of Rule 717(d) for a member to effectively facilitate an
order by providing an opportunity for a customer or other person
(including affiliates) to regularly execute against agency orders
handled by the member immediately upon their entry on the Exchange.
    \36\ Securities Exchange Act Release No. 60253 (July 7, 2009),
74 FR 34063 (July 14, 2009) (SR-ISE-2009-34).
    \37\ Securities Exchange Act Release No. 61433 (January 27,
2010), 75 FR 5824 (February 4, 2010) (SR-ISE-2010-04). See also,
supra note 12 (definition of Priority Customer Order).
---------------------------------------------------------------------------

    Pursuant to Rule 721, Customer Cross Orders are automatically
executed upon entry provided that the execution: (i) Is at or between
the best bid and offer on the Exchange, (ii) is not at the same price
as a Priority Customer Order on the book, and (iii) will not trade
through the NBBO.\38\ Customer Cross Orders are rejected if they cannot
be executed. Rule 721 also provides that Customer Cross Orders may only
be entered in the trading increments applicable to the options class
under Rule 710, and that Supplemental Material .01 to Rule 717, which
prohibits a member from being a party to any arrangement designed to
circumvent the requirements applicable to executing agency orders as
principal, applies to Complex Customer Cross Orders.
---------------------------------------------------------------------------

    \38\ ISE Rule 1901 (Order Protection) prohibits members from
trading through Protected Bids and Protected Offers from other
options exchanges.
---------------------------------------------------------------------------

    Just as the Exchange has applied the exposure requirements of Rule
717(d) and (e) for facilitation and solicitation transactions involving
Complex Orders, it has also provided for Complex Customer Cross Orders
for the execution of off-setting complex Priority Customer Orders,
which are not required to be exposed under Rule 717(d) and (e). The
Exchange processes Complex Customer Cross Orders consistent with all of
the applicable rules. Specifically, Rule 722(b) provides that
``[e]xcept as otherwise provided in this Rule, Complex Orders shall be
subject to all other Exchange Rules that pertain to orders generally.''
As discussed above, current Rule 722(b)(1) provides that Complex Orders
may be traded in any decimal increment ``regardless of the minimum
increments otherwise applicable to the individual legs of the orders,''
Rule 722(b)(2) (renumbered Rule 722(c)(2) under the proposal) provides
that a Complex Order may not trade at prices that are worse than the
best bids and offers on the Exchange in the individual series (nor in
most circumstances at the same price as a Priority Customer Order), and
current Rule 722(b)(3) provides that ``[c]omplex orders will be
executed without consideration of any prices that might be available on
other exchanges trading the same options contract.'' \39\ Accordingly,
when executing Complex Customer Cross Orders, the Exchange permits the
execution of a Complex Customer Cross Order so long as it is at or
better than the best price available for the same complex strategy on
the complex order book and there are no Priority Customer Orders at
that price on the complex order book as required by Rule 721(a). The
Exchange also applies the regular trading increments

for complex orders and Supplementary Material .01 to Rule 717 as
specified in Rule 721(a). Pursuant to Rule 722(b)(3), the Exchange does
not take into consideration prices available at other exchanges (i.e.,
there is no NBBO for Complex Orders or trade-through protection),\40\
and applies instead the priority rules for Complex Orders contained in
Rule 722(b)(2), which prevents a Complex Order from trading at prices
that are worse than the best bids and offers on the Exchange in the
individual series (and in most circumstances at the same price as a
Priority Customer Order).
---------------------------------------------------------------------------

    \39\ A transaction that is effected as a portion of a Complex
Trade is exempted from the order protection rule. ISE Rule
1901(b)(7).
    \40\ Id.
---------------------------------------------------------------------------

    The Exchange believes that its application of the Customer Cross
Order for Complex Orders is consistent with all applicable existing
Exchange rules and with the purpose underlying Customer Cross Orders.
Specifically, the Complex Customer Cross Order protects Priority
Customer Orders on the complex order book just as Priority Customer
Orders are protected in the regular market pursuant to Rule 721(a).
Furthermore, by applying the priority rules for Complex Orders
contained in Rule 722(b)(2) (renumbered Rule 722(c)(2) under the
proposal), Priority Customer Orders on the Exchange for the individual
series are protected to the same extent as when any other Complex
Orders are executed on the complex order book, and in particular when
two off-setting Priority Customer Orders are entered on the complex
order book nearly simultaneously rather than as a single Customer Cross
Order.
    The Exchange also proposes to adopt text in Supplementary Material
.08 to Rule 722 addressing how Qualified Contingent Cross Orders
(``QCCs''), including QCC with Stock Orders, apply to Complex Options
Orders. Pursuant to Rule 715(j), QCCs are orders to buy or sell at
least 1,000 contracts that are identified as being part of a qualified
contingent trade, as that term is defined in Supplementary Material .01
to Rule 715.\41\ QCCs are not limited to Priority Customers. QCCs are
executed upon entry without being exposed provided that the execution
is at or between the NBBO and is not at the same price as a Priority
Customer Order on the Exchange's limit order book. QCCs were adopted in
2011 following the elimination of the trade-through exemption for block
trades in the options market,\42\ as the Exchange recognized that the
loss of the block trade exemption would adversely affect the ability of
ISE members to effect large trades that are tied to stock (i.e., Stock
Options Orders [sic] and Stock-Complex Orders). The QCC addresses the
dislocation resulting from elimination of the block trade exemption by
permitting members to provide their customers a net price for the
entire trade, and then allowing the members to execute the options leg
of the trade on the ISE at a price at least equal to the NBBO while
using the Qualified Contingent Trade (``QCT'') exemption \43\ to effect
the trade in the equities leg at a price necessary to achieve the net
price. Pursuant to Rule 721(b), a QCC must be executed at a price that
is at or between the NBBO. Furthermore, a QCC may not be executed at
the same price as a Priority Customer Order in the series on the
Exchange.
---------------------------------------------------------------------------

    \41\ The definition of QCC [sic] trade is substantively
identical to the Commission's definition of a Qualified Contingent
Transaction (``QCT'') for which the Commission, by order, has
provided trade-through relief in the equities market. Securities
Exchange Act Release No. 57620 (April 4, 2008), 73 FR 19271 (April
9, 2008) (the ``QCT Release''). Pursuant to Supplementary Material
.01 to ISE Rule 715, a QCC trade must meet the following conditions:
(i) At least one component must be an NMS Stock; (ii) all the
components must be effected with a product price contingency that
either has been agreed to by all the respective counterparties or
arranged for by a broker-dealer as principal or agent; (iii) the
execution of one component must be contingent upon the execution of
all other components at or near the same time; (iv) the specific
relationship between the component orders (e.g., the spread between
the prices of the component orders) must be determined by the time
the contingent order is placed; (v) the component orders must bear a
derivative relationship to one another, represent different classes
of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or cancelled; and (iv) the transaction must be fully
hedged (without regard to any prior existing position) as a result
of other components of the contingent trade. Consistent with the QCT
Release members must demonstrate that the transaction is fully
hedged using reasonable risk-valuation methodologies.
    \42\ Securities Exchange Act Release No. 63955 (File No. SR-ISE-
2010-73), 76 FR 11533 (March 2, 2011) (``QCC Release''). The
Distributive Linkage Plan replaced the Plan for the Purpose of
Creating and Operating an Intermarket Option Linkage (``Old Linkage
Plan''), and the Exchange's Linkage Rules replaced the existing ISE
rules implementing the Old Plan (the ``Old Linkage Rules''). The Old
Linkage Plan and the Old Linkage Rules provided a limited Trade-
Through exemption for ``Block Trades,'' defined to be trades of 500
or more contracts with a premium value of at least $150,000.
However, as with Regulation NMS, the Distributive Linkage Plan did
not provide a Block Trade exemption.
    \43\ See QCT Release, supra note 41.
---------------------------------------------------------------------------

    Qualified Contingent Transactions may have multiple options
components, in which case members may enter QCCs with multiple options
legs (i.e., a Complex Options Order), and the Exchange applies the same
principles contained in Rule 721(b) when executing such orders. For
clarity, the Exchange proposes to specify in Supplementary Material .08
to Rule 722 that Complex Options Orders entered as QCCs are
automatically executed upon entry so long as: (i) The price of the
transaction is at or within the best bid and offer for the same complex
options strategy on the complex order book; (ii) there are no Priority
Customer Complex Options Orders for the same strategy at the same price
on the complex order book; and (iii) the individual options legs can be
executed at prices that are at or between the NBBO for the individual
series, and comply with the provisions of Rule 722(c)(2)(i), provided
that no legs of the Complex Options Order can be executed at the same
price as a Priority Customer Order on the Exchange in the individual
options series. The proposed text also specifies that Complex Qualified
Contingent Cross Orders are automatically canceled if they cannot be
executed. In addition, Complex Qualified Contingent Cross Orders may
only be entered in the regular trading increments applicable pursuant
to Rule 722(c)(1), and each leg of a Complex Options Order must meet
the 1,000 contract minimum size requirement for Qualified Contingent
Cross Orders.
    The Exchange further believes that the proposed text is consistent
with the requirements of Rule 721(b) and Rule 722, and that adding the
proposed text to Rule 722 will provide clarity with respect to the
execution of complex QCCs. In particular, the Exchange notes that in
executing complex QCCs, Priority Customer Orders on the complex order
book and Priority Customer Orders on the Exchange for the individual
options series are protected. The purpose of allowing QCCs to be
executed without exposure is to facilitate the execution of the options
component of a QCT in the Exchange's electronic market. As such, the
Exchange's initial QCC proposal did not provide for Priority Customer
protection. However, the Exchange amended the proposal to provide for
Priority Customer protection to alleviate concerns that adoption of the
QCC, which is not limited to Priority Customers, would deprive Priority
Customers of executions of their resting orders, which might also
create a disincentive to placing Priority Customer limit orders on the
Exchange.\44\ In its approval order, the Commission noted that the QCC
proposal was consistent with the NMS QCT Exemption, which found that
QCTs are of benefit to the market as a whole and a contribution to the
efficient functioning of the securities markets and the price discovery
process, but also

noted that the ISE's QCC proposal was narrowly drawn to provide a
limited exception to the general principle of exposure, and that it
retained the general principle of customer priority.\45\ Accordingly,
when implementing complex QCCs, the Exchange believed it was necessary
and appropriate to protect Priority Customer Orders for the individual
series in addition to Priority Customer Orders on the complex order
book when executing complex QCCs. Similarly, the Exchange believed it
was necessary and appropriate to execute the individual legs of complex
QCCs only at prices that are at or between the NBBO for the individual
series.
---------------------------------------------------------------------------

    \44\ QCC Release, supra note 42 at 11541.
    \45\ Id.
---------------------------------------------------------------------------

    The proposed rules also explain how QCC with Stock Complex Orders
are handled on the Exchange.\46\ The QCC with Stock Order is a piece of
functionality that facilitates the execution of stock [sic] component
of qualified contingent trades.\47\ In particular, a QCC with Stock
Order is a QCC Order entered with a stock component to be communicated
to a designated broker-dealer for execution. Since QCC Orders represent
one component of a qualified contingent trade, each QCC Order must be
paired with a stock transaction. Whereas members are required to
separately execute the stock component of a regular Qualified
Contingent Cross Complex Order, with a QCC with Stock Complex Order,
the Exchange will attempt to facilitate the execution of the stock
component in addition to the options component. When a member enters a
QCC with Stock Complex Order, a Qualified Contingent Cross Complex
Order is entered on the Exchange pursuant to Supplementary Material
.08(e) to Rule 722. If the Qualified Contingent Cross Complex Order is
executed, the Exchange will automatically communicate the stock
component to the member's designated broker-dealer for execution.
Alternatively, if the Qualified Contingent Cross Complex Order cannot
be executed, the entire Complex QCC with Stock Order, including both
the stock and options components, is cancelled.\48\ Supplementary
Material .01-.03 to Rule 721 apply to the entry and execution of
Complex QCC with Stock Orders. As explained in more detail in the QCC
with Stock Notice,\49\ QCC with Stock Orders assist members in
maintaining compliance with Exchange rules regarding the execution of
the stock component of qualified contingent trades, and help maintain
an audit trail for surveillance of members for compliance with such
rules.
---------------------------------------------------------------------------

    \46\ See Proposed Rule 722(b)(16) and Supplementary Material
.08(f) to Rule 722.
    \47\ See Securities Exchange Act Release No. 80090 (February 22,
2017), 82 FR 12150 (February 28, 2017) (SR-ISE-2017-12) (``QCC with
Stock Notice'').
    \48\ Members that execute the options component of a qualified
contingent trade entered as a QCC with Stock Order remain
responsible for the execution of the stock component if they do not
receive an execution from their designated broker-dealer. The
Exchange conducts surveillance to ensure that members execute the
stock component of their qualified contingent trades. See id.
    \49\ Id.
---------------------------------------------------------------------------

Simultaneous Auctions
    In addition to other language describing the Exchange's processes
for auctioning eligible Complex Orders as described above, the Exchange
proposes to add language to Proposed Supplementary Material .01(b)(iii)
and Proposed Supplementary Material .08(c)(4)(vi) regarding the
processing of simultaneous auctions. The Complex Order Exposure and
Price Improvement Mechanisms are eligible for termination before the
end of the exposure period pursuant to Supplementary Material
.01(b)(ii) and .08(c)(4)(v) to Rule 722. Specifically, these auctions
are subject to early termination on the receipt of a Complex Order or
quote for the same complex strategy on either side of the market that
is marketable against the complex order book or bids and offers for the
individual legs (including when the system receives a marketable
Complex Order though the Complex Uncrossing Process described in
Supplementary Material .12 to Rule 722); or the receipt of a non-
marketable Complex Order or quote for the same complex strategy on the
same side of the market that would cause the price of the Complex Order
being auctioned to be outside of the best bid or offer for the same
complex strategy on the complex order book.
    In the event auctions are early terminated, the auctions will be
processed in the sequence in which they were started. Furthermore, if
an early termination condition occurs on a component leg of a complex
strategy, the component leg auctions are early terminated first. If the
event also affects a complex strategy, then auctions in the complex
strategy will be evaluated for early termination and processing after
auctions for the component legs have been processed. Eligible interest
remaining on the Exchange's order books after an auction trades may
trade with subsequent auctions as those are processed. The Exchange
notes that except as provided in Supplementary Material .08(a)(2),
(b)(2) to Rule 722 with respect to trading halts, the Complex
Facilitation Mechanism and Complex Solicitation Mechanism do not
terminate prior to the end of the period given for the entry of
Responses.
Price Limits for Complex Orders and Quotes
    Current Rule 722(b)(3) (renumbered Rule 722(d) under the proposal)
provides that complex strategies may be executed without consideration
of any prices that might be available on other exchanges trading the
same options contracts: (i) By trading on the complex order book, (ii)
by legging to access liquidity on the regular order book, or (iii)
through a process whereby Complex Orders are marked for price
improvement (i.e., a Complex Order Exposure, as detailed in other parts
of this rule change). Nevertheless, the Exchange believes that members
may not want complex strategies to trade at prices that are
significantly outside the market for the individual legs. Supplementary
Material .07(a) to Rule 722 therefore establishes a risk protection
that limits the amount that the legs of a complex strategy may be
executed at prices inferior to the prices available on other exchanges
trading the same options series.\50\ The Exchange proposes to include a
reference in this rule to the stock leg of Stock-Option Strategies and
Stock-Complex Strategies as well for clarity. In particular, the legs
of a complex strategy cannot trade through the national best bid or
offer 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.\51\
---------------------------------------------------------------------------

    \50\ Other options exchanges have similar rules for trading the
legs of a complex order at prices at inferior prices. See e.g., BOX
Rule 7240(b)(3)(iii)(A).
    \51\ Supplementary Material .07 to Rule 722 also allows members
to include an instruction on their Complex Orders that each leg is
to be executed at a price that is equal to or better than the
national best bid or offer.
---------------------------------------------------------------------------

    In addition, the Exchange proposes to amend this rule to state
that, unless the applicable rule states otherwise, when calculating the
best net price achievable from the best ISE bids and offers for the
individual legs, the price of the stock leg is the national best bid or
offer price calculated pursuant to this Supplementary Material .07(a)
to Rule 722. In connection with this change, the Exchange also proposes
to amend its rules for the Limit Order Price Protection pursuant to
Supplementary Material .07(d) to Rule 722 to clarify that the national
best bid or offer price

is used for any stock leg. The Exchange believes that these two changes
will increase transparency about the prices used by the Exchange for
various purposes where the Exchange must derive a best bid or offer
price from the prices available in the regular market.
    Furthermore, Supplementary Material .07(d) to Rule 722 provides
that the Exchange will reject Limit Complex Orders to buy (sell) if the
net price of the Limit Complex Order exceeds (is below) the net price
available from the individual options series on the Exchange by a
specified amount. Currently, the Exchange's rule states that this limit
is established for Complex Orders to buy (sell) as the greater of the
net price available from the individual options series on the Exchange
plus (minus) an absolute or percentage amount determined by the
Exchange. While this reflects the limit order price protection for
Limit Complex Orders to buy, it suggests that the Exchange will reject
Limit Complex Orders to sell based on whether the Limit Complex Order
is priced below the greater (rather than lesser) of (1) the net price
available from the individual options series minus the applicable
absolute amount, or (2) the net price available from the individual
options series minus the percentage amount. To adequately describe the
rule for Limit Complex Orders to sell, the Exchange proposes to amend
this rule text to state that the limit is established for Complex
Orders to buy (sell) as the net price available from the individual
options series on the Exchange plus (minus) the greater of the absolute
or percentage values described in the rule.
Trade Value Allowance
    The Exchange proposes to adopt text in proposed Supplementary
Material .09 to Rule 722 that clarifies how the Exchange handles Stock-
Option Strategies and Stock Complex Strategies when different minimum
trading increments are allowed for the stock and options legs of such
trades. Members enter Stock-Option Strategies and Stock Complex
Strategies on the complex order book with a single net price that
includes all stock and option legs of the order. As the stock leg is
eligible for execution at finer increments permitted by the equity
market responsible for executing the stock portion of such orders,\52\
Members can submit Stock Option [sic] Strategies and Stock Complex
Strategies with up to a number of decimal places determined by the
Exchange. The options leg(s), however, must be executed in one cent
increments, in keeping with the minimum increment permitted for options
executions.\53\ After calculating the appropriate options match price
expressed in a valid one cent increment, the trading system will
calculate the corresponding stock match price. This stock match price
must be rounded to the increment supported by the equity market. In a
small subset of cases, this rounding may result in a small difference
between the expected notional value of the trade and the actual trade
value (i.e., a ``Trade Value Allowance'').\54\ Members generally prefer
not to forgo an execution for their Stock-Option Strategies and Stock-
Complex Strategies when there is a Trade Value Allowance, as the amount
of the rounding is miniscule compared to the total value of the trade.
Therefore, the Exchange offers to members functionality that allows
Stock-Option Strategies and Stock-Complex Strategies to trade outside
of their specified net prices so long as the amount of any Trade Value
Allowance does not exceed a value determined by the member. Members
have the option of opting out of this functionality if they do not want
their orders to be executed when there is a Trade Value Allowance of
any amount. In such cases, the Exchange will strictly enforce the net
price marked on the order. For members that do not supply their own
values, default values determined by the Exchange and announced to
members will be applied instead. Any amount of Trade Value Allowance is
permitted for auction orders pursuant to Supplementary Material .08 to
Rule 722 that do not trade solely with their contra-side order.
---------------------------------------------------------------------------

    \52\ See Rule 722(c)(1).
    \53\ Id.
    \54\ Proposed Supplementary Material .09 to Rule 722 defines
``Trade Value Allowance'' as the percentage difference between the
expected notional value of a trade and the actual notional value of
the trade.
---------------------------------------------------------------------------

Example
--Member has set a Trade Value Allowance of 0.05% of the expected trade
value.
--Member enters order to Sell 57 shares of ABC stock and Buy a Jan 80
ABC call with a net price of $43.746 and a quantity of 77.
--Order matched with corresponding contra order on the complex order
book.
--The expected trade value based on the order's limit price/quantity
and a contract multiplier of 100 is $336,844.20--i.e., $43.746 x 77 x
100.
--Calculated options match price is $2.39 based on market prices and
the stock match price is $80.940351 (rounded to six decimals).
--The rounding of the stock match price results in a total notional
trade value of $336,844.200539--i.e., 77 x (($80.940351 x 57)--($2.39 x
100)).
--The total notional Trade Value Allowance is approximately $0.000539--
i.e., less than one cent.
--Order is executed as the Trade Value Allowance is less than 0.05% of
the expected trade value of $336,844.20.
    Trade Value Allowance is helpful as this feature allows members to
receive an expeditious execution, and trade the stock and options
components of a Stock-Option Strategy or Stock-Complex Strategy in a
moving market without introducing legging risk. Without this
functionality members would be forced to resubmit their orders and
potentially receive a much worse price or miss an execution.
Complex Opening Process
    Options series traded on the Exchange are opened pursuant to Rule
701 at the opening of the Exchange each business day, or during the
reopening of the market after a trading halt.\55\ Proposed
Supplementary Material .10 describes the Exchange's Complex Opening
Process, and provides that after each of the individual component legs
have opened, or reopened following a trading halt, Complex Options
Strategies will be opened pursuant to the Complex Opening Price
Determination described in Supplementary Material .11 to Rule 722, and
Stock-Option Strategies and Stock-Complex Strategies will be opened
pursuant to the Complex Uncrossing Process described in Supplementary
Material .12(b) to Rule 722.\56\ Each of these processes is described
in more detail below.
---------------------------------------------------------------------------

    \55\ Complex orders and quotes are disseminated to subscribers
of the Exchange's market data feeds prior to the commencement of the
Complex Opening Process. When the complex strategy has opened the
Exchange disseminates a trading state indicating that regular
trading has begun.
    \56\ The Complex Uncrossing Process is also used during regular
trading when a resting Complex Order or quote that is locked or
crossed with other interest becomes executable.
---------------------------------------------------------------------------

Complex Opening Price Determination
    Complex Options Strategies are opened pursuant to an opening
process that attempts to execute Complex Orders and quotes on the
complex order book at a single price that is within Boundary Prices
that are constrained by the NBBO for the individual legs, thereby
serving an important price discovery function.
    Proposed Supplementary Material .11(b) to Rule 722 provides that
eligible interest during the Complex Opening Price Determination
includes Complex Orders and quotes on the complex order

book except the non-displayed portion of Reserve Complex Orders. The
non-displayed portion of a Reserve Complex Order is contingent, non-
displayed interest, and therefore not eligible for the Complex Opening
Process. Allowing only the displayed portion of Reserve Complex Orders
to participate in the Complex Opening Price Determination encourages
members to enter displayed interest to participate in the opening
auction, and ensures that the price discovery that occurs in the
Complex Opening Price Determination is not skewed by interest that is
not displayed to market participants. The non-displayed portion of a
Reserve Complex Order may participate in the Complex Uncrossing Process
pursuant to Proposed Supplementary Material .12(b) and thereby receive
an execution during the Complex Opening Process. In addition, only
interest on the complex order book is considered for the Complex
Opening Price Determination as this part of the process is designed to
promote price discovery for the complex strategy, and therefore bids
and offers for the individual legs of the Complex Strategy are not
eligible to participate in the Complex Opening Price Determination but
will participate in the Complex Uncrossing Process.
    Proposed Supplementary Material .11(c) to Rule 722 describes the
Exchange's process for opening when the best bid for a complex strategy
does not lock or cross the best offer. In particular, if the best bid
for a complex strategy does not lock or cross the best offer, there
will be no trade in the Complex Opening Price Determination and the
complex strategy will open pursuant to the Complex Uncrossing Process
described in Supplementary Material .12(b) to Rule 722. The Exchange
believes that it is appropriate to open with a Complex Order Uncrossing
when the complex order book is not executable in the Complex Opening
Price Determination as the uncrossing process supports the trading of
additional interest and will thereby provide another opportunity for
Complex Orders and quotes to be executed in the Complex Opening
Process.
    Proposed Supplementary Material .11(d) to Rule 722 describes the
Exchange's process for opening a Complex Strategy when a trade may be
possible--i.e., if the best bid for the complex strategy locks or
crosses the best offer.
    First, the system calculates Boundary Prices \57\ at or within
which Complex Orders and quotes may be executed during the Complex
Opening Price Determination. Boundary prices are calculated to ensure
that the opening price is at or within the individual bids and offers
established in the market. In particular, the Boundary Prices are
calculated based on the NBBO for the individual legs; provided that, if
the NBBO for any leg includes a Priority Customer order on the
Exchange, the system adjusts the Boundary Prices according to Rule
722(c)(2).
---------------------------------------------------------------------------

    \57\ See Proposed Supplementary Material .11(d)(i) to Rule 722.
---------------------------------------------------------------------------

Example 1
--Complex strategy to buy 1 contract of Series A and 1 contract of
Series B
--ABBO for Series A is $1.00 x $1.03
--ISE BBO for Series A is $1.01 x 1.04
--ABBO for Series B is $0.98 x $1.01
--ISE BBO for Series B is $0.98 x $1.02
--Boundary price is $1.99 x $2.04
Example 2
--Market is the same as described in Example 1 above except that the
ISE BBO for Series B includes a Priority Customer order on the bid
--Boundary price is $2.00 x $2.04 as the bid boundary is adjusted
according to Rule 722(c)(2)

    Next, the Exchange will calculate the Potential Opening Price \58\
and Opening Price \59\ pursuant to Proposed Supplementary Material
.11(d)(ii)-(iv) to Rule 722.
---------------------------------------------------------------------------

    \58\ See Supplementary Material .11(d)(ii)-(iii) to Rule 722.
    \59\ See Supplementary Material .11(d)(iv) to Rule 722.
---------------------------------------------------------------------------

    The Potential Opening Price is first calculated pursuant to
Proposed Supplementary Material .11(d)(ii) to Rule 722 by identifying
the price(s) at which the maximum number of contracts can trade
(``maximum quantity criterion'') taking into consideration all eligible
interest pursuant to Supplementary Material .11(b) to Rule 722.
Proposed Supplementary Material .11(d)(iii) to Rule 722 also outlines
additional considerations for calculating the Potential Opening Price
when multiple prices would satisfy the maximum quantity criterion.
Generally, when two or more Potential Opening Prices would satisfy the
maximum quantity criterion: (A) Without leaving unexecuted contracts on
the bid or offer side of the market at those prices, the system takes
the highest and lowest of those prices and takes the mid-point;
provided that (1) if the highest and/or lowest price described above is
through the price of a bid or offer that is priced to not allocate in
the Complex Opening Price Determination, the highest and/or lowest
price will be rounded to the price of such bid or offer that is priced
to not allocate before taking the mid-point, and (2) if the mid-point
is not expressed as a permitted minimum trading increment, it will be
rounded down to the nearest permissible minimum trading increment; or
(B) leaving unexecuted contracts on the bid (offer) side of the market
at those prices, the Potential Opening Price is the highest (lowest)
executable bid (offer) price. Notwithstanding the foregoing: (C) if
there are Market Complex Orders on the bid (offer) side of the market
that would equal the full quantity of Complex Orders and quotes on
offer (bid) side of the market, the limit price of the highest (lowest)
priced Limit Complex Order or quote is the Potential Opening Price; and
(D) if there are only Market Complex Orders on both sides of the
market, or if there are Market Complex Orders on the bid (offer) side
of the market for greater than the total size of Complex Orders and
quotes on the offer (bid) side of the market, there will be no trade in
the Complex Opening Price Determination and the complex strategy will
open pursuant to the Complex Uncrossing Process described in
Supplementary Material .12(b) to Rule 722. The examples below
illustrate the scenarios discussed above, opening a complex strategy to
buy 1 contract of Series A and 1 contract of Series B.
Example 3
--The following Complex Orders are on the complex order book:
    [cir] Buy Complex Order for 10 contracts at $0.42
    [cir] Buy Complex Order for 10 contracts at $0.41
    [cir] Sell Complex Order for 10 contracts at $0.32
    [cir] Sell Complex Order for 10 contracts at $0.35
--20 contracts can be allocated at prices between $0.35 and $0.41
without leaving unexecuted contracts on the bid or offer side of the
market of Complex Orders and quotes to be traded at those prices.
--The system therefore takes the mid-point of these prices (i.e.,
$0.38) as the Preliminary Opening Price pursuant to paragraph (A)
above.
Example 4
--The following Complex Orders are on the complex order book:
    [cir] Buy Complex Order for 10 contracts at $0.42
    [cir] Buy Complex Order for 10 contracts at $0.41
    [cir] Buy Complex Order for 10 contracts at $0.33
    [cir] Sell Complex Order for 20 contracts

at $0.32
    [cir] Sell Complex Order for 10 contracts at $0.35
--20 contracts can be allocated at prices between $0.32 and $0.41
without leaving unexecuted contracts on the bid or offer side of the
market of Complex Orders and quotes to be traded at those prices;
however, both of those prices are through the price of a bid or offer
that is priced not to allocate--i.e., the Buy Complex Order at $0.33
and the Sell Complex Order at $0.35.
--The system therefore rounds these prices to the price of interest
priced not to allocate (i.e., $0.33 and $0.35) before taking the mid-
point of these prices (i.e., $0.34) as the Preliminary Opening Price
pursuant to paragraph (A) above.
Example 5
--The following Complex Orders are on the complex order book:
    [cir] Buy Complex Order for 20 contracts at $0.41
    [cir] Sell Complex Order for 10 contracts at $0.35
--10 contracts can be allocated at prices between $0.35 and $0.41
leaving unexecuted contracts on the bid side of the market of Complex
Orders and quotes to be traded at those prices (i.e., 10 contracts to
buy).
--The system therefore takes the highest executable bid (i.e., $0.41)
as the Preliminary Opening Price pursuant to paragraph (B) above.
Example 6
--The following Complex Orders are on the complex order book:
    [cir] Buy Market Complex Order for 20 contracts
    [cir] Sell Complex Order for 10 contracts at $0.35
    [cir] Sell Complex Order for 10 contracts at $0.40
--The 20 contracts of Market Complex Order quantity on the bid side of
the market equals the full 20 contracts available on the offer side of
the market.
--The system therefore takes limit price of the highest priced Limit
Complex Order (i.e., the Sell Complex Order priced at $0.40) as the
Preliminary Opening Price pursuant to paragraph (C) above.
Example 7
--The following Complex Orders are on the complex order book:
    [cir] Buy Market Complex Order for 30 contracts
    [cir] Sell Complex Order for 10 contracts at $0.35
    [cir] Sell Complex Order for 10 contracts at $0.40
--The 30 contracts of Market Complex Order quantity on the bid side of
the market exceeds the full 20 contracts available on the offer side of
the market.
--There is no Potential Opening Price and no trade is possible in the
Opening Price Determination pursuant to paragraph (D) above. The
Complex Opening Process continues to the Complex Uncrossing Process.

    Pursuant to Proposed Supplementary Material .11(d)(iv) to Rule 722,
if the Potential Opening Price is at or within the Boundary Prices, the
Potential Opening Price becomes the Opening Price. If the Potential
Opening Price is not at or within the Boundary Prices, the Opening
Price will be the price closest to the Potential Opening Price that
satisfies the maximum quantity criteria without leaving unexecuted
contracts on the bid or offer side of the market at that price and is
at or within the Boundary Prices. If the bid Boundary Price is higher
than the offer Boundary Price, or if no valid Opening Price can be
found at or within the Boundary Prices, there will be no trade in the
Complex Opening Price Determination and the complex strategy will open
pursuant to the Complex Uncrossing Process described in Supplementary
Material .12(b) to Rule 722.
Example 8
--Individual leg prices are the same as Example 1 in this opening
section. In addition, the following Complex Orders are on the book:
    [cir] Buy Complex Order 1 for 10 contracts at $2.02
    [cir] Buy Complex Order 2 for 15 contracts at $2.03
    [cir] Sell Complex Order 3 for 30 contracts at $2.02
--$2.02 is the Preliminary Opening Price as this is the price at which
the maximum size of 25 contracts can be allocated. Since $2.02 is at or
within the Boundary Prices (see Example 1) it is also the Opening
Price.
--Buy Complex Order 1 and Buy Complex Order 2 are executed in full;
Sell Complex Order 3 executes 25 contracts.
--The remaining 5 contracts of Sell Complex Order 3 will rest on the
complex order book as there is no locked/crossed interest to
participate in the Complex Uncrossing Process.
Example 9
--Individual leg prices are the same as Example 1 in this opening
section. In addition, the following Complex Orders are on the book:
    [cir] Buy Complex Order 1 for 20 contracts at $2.06
    [cir] Sell Complex Order 1 for 20 contracts at $2.04
--20 contracts can be allocated at prices between $2.04 and $2.06
without leaving unexecuted contracts on the bid or offer side of the
market of Complex Orders and quotes to be traded at those prices.
--The system therefore takes the mid-point of these prices (i.e.,
$2.05) as the Preliminary Opening Price pursuant to paragraph (A)
above.
--Since $2.05 is outside the Boundary Prices (see Example 1) the
Opening Price will be $2.04--i.e., the price closest to the Potential
Opening Price that satisfies the maximum quantity criteria without
leaving unexecuted contracts on the bid or offer side of the market at
that price and is at or within the Boundary Prices.
    Finally, the Exchange will allocate contracts to trade during the
Complex Opening Process. In particular, where there is an execution
possible, the system will give priority to Market Complex Orders first,
then to resting Limit Complex Orders and quotes on the complex order
book. The allocation provisions of Rule 722(d)(2) apply with respect to
Complex Orders and quotes with the same price with priority given first
to better priced interest.
    Proposed Supplementary Material .11(vi) to Rule 722 provides that
the system will refresh Reserve Complex Orders pursuant to Rule
722(b)(4)(iv) following the execution of the displayed portion of
Reserve Complex Orders in the process described above.
    Proposed Supplementary Material .11(vii) to Rule 722 describes the
Exchange's process for uncrossing the complex order book following the
Complex Opening Price Determination described above. In particular, if
the complex order book remains locked or crossed following the steps
described above, the system will process any remaining Complex Orders
and quotes, including Opening Only Complex Orders and the non-displayed
portion of Reserve Complex Orders, in accordance with the Complex
Uncrossing Process described in Supplementary Material .12(b) to Rule
722. Bids and offers for the individual legs of the complex strategy
will be eligible to participate in the Complex Uncrossing Process.

Complex Uncrossing Process
    Proposed Supplementary Material .12(b) to Rule 722 describes the
Exchange's process for uncrossing the complex order book when a resting
Complex Order or quote that is locked or crossed with other interest
becomes executable during regular trading or as part of the Complex
Opening Process. The Complex Uncrossing Process applies to Complex
Options Strategies, Stock-Option Strategies, and Stock-Complex
Strategies. Complex strategies are uncrossed using the following
procedure: First, the system identifies the oldest Complex Order or
quote among the best priced bids and offers on the complex order book--
i.e., based on the limit or market price of Complex orders and quotes
on the complex order book. When determining which bids and offers are
at the best price, all Complex Orders and quotes are considered at
their limit or market price. A Complex Order entered with an
instruction that it must be executed at a price that is equal to or
better than the national best bid or offer pursuant to Supplementary
Material .07(a) to Rule 722 is also considered based on its actual
limit or market price and not the price of the national best bid or
offer for the component legs at which the order would be executed, as
would otherwise be the case. Then, the selected Complex Order or quote
is matched pursuant to Rule 722(d)(2)-(3) with resting contra-side
interest on the complex order book and, for Complex Orders, bids and
offers for the individual legs of the complex strategy. This process is
repeated until the complex order book is no longer executable.\60\
---------------------------------------------------------------------------

    \60\ The Exchange will manage and curtail repetition of the
Complex Uncrossing Process so as to not negatively impact system
capacity and performance.
---------------------------------------------------------------------------

Example 10
--Individual leg prices are the same as Example 1 above. In addition,
the following Complex Orders and quotes are on the book:
    [cir] Sell Complex Order 1 at $2.02 submitted at time T1
    [cir] Sell Complex Order 2 at $2.02 submitted at time T2
--ISE Bid on Series B improves to $1.01 such that the leg markets are
now executable with the resting Sell Complex Orders.
--Complex Uncrossing Process will occur. Complex Order 1 is the oldest
Complex Order at the best price and is selected and trades with the leg
markets first--i.e. Complex Order 1 will trade with the ISE Best Bid on
Series A at 1.01 and the ISE Best Bid on Series B at 1.01. After
Complex Order 1, Complex Order 2 will be selected and can trade with
the remaining quantity on the leg markets.
    The Complex Uncrossing Process serves an important function when
used in the Complex Opening Process and during regular trading. The
Complex Opening Price Determination described in the section above is
designed to permit interest residing on the complex order book to trade
at a single price pursuant to a price discovery process within Boundary
Prices that are constrained by the NBBO for the individual legs. There
may be additional interest on the complex order book that could trade,
for example, by legging to access liquidity on the regular order book.
In addition, trades during the Complex Uncrossing Process are not
constrained by the NBBO for the individual legs and can instead trade
at prices permitted under Supplementary Material .07 to Rule 722, which
allows the legs of a complex strategy to trade through the NBBO for the
individual legs by a configurable amount. The Exchange therefore
continues the Complex Opening Process by performing an uncrossing if
the Complex Opening Price determination fails to discover an
appropriate execution price (for example, if no valid Opening Price can
be found at or within the Boundary Prices) or where there continues to
be interest that is locked or crossed after Complex Orders and quotes
are executed in the Complex Opening Price Determination. Furthermore,
the Complex Uncrossing Process provides an efficient and fair way of
determining how to execute Complex orders and quotes when interest that
is locked or crossed becomes executable during regular trading. During
the trading day there may be Complex Orders and quotes on the complex
order book that are locked or crossed with other interest but that are
not executable, for example, because the legs cannot be printed at
permissible prices. When market conditions change and these Complex
Orders or quotes become executable, the Exchange uses the Complex
Uncrossing Process to execute Complex Orders or quotes against resting
contra-side interest.
Updates to Rule 722
    The first two paragraphs of Rule 722 currently provide for the
delay of re-introduction for certain complex functionality until
specified dates, namely the legging functionality for Stock-Option
Orders and functionality which permits concurrent complex order
auctions, as further described in this Rule. The Exchange now proposes
to update the rule references presently contained in these provisions
to reflect the proposed renumbering and expansion of rules described
above.\61\
---------------------------------------------------------------------------

    \61\ Specifically: Current Rule 722(b)(3)(ii) (proposed Rule
722(d)(3)), current Rule 722(b)(3)(iii) (proposed Rule 722(d)(1) and
Supplementary Material .01 to Rule 722), current Supplementary
Material .08 to Rule 716 (proposed Supplementary Material .08(a) and
.08(b) to Rule 722), and current Supplementary Material .09 to Rule
723 (proposed Supplementary Material .08(c) to Rule 722).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \62\ in
general, and furthers the objectives of Section 6(b)(5) of the Act \63\
in particular, in that it is designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
for a free and open market and a national market system, and, in
general, to protect investors and the public interest. The proposed
rule change provides greater clarity regarding how Complex Orders are
processed on the Exchange and expands upon various existing provisions
within the Exchange's rules, including by adopting a rule that
addresses the Exchange's process for opening complex strategies. The
Exchange therefore believes that the proposed rule change will better
enable members and investors to make informed decisions regarding the
use of Complex Orders on the Exchange.
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    \62\ 15 U.S.C. 78f(b).
    \63\ 15 U.S.C. 78f(b)(5).
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    Specifically, with respect to the proposed changes to the
definitions contained in Rule 722, the Exchange believes it is
consistent with Section 6(b)(5) of the Act to more clearly identify
Complex Options Strategies, Stock-Option Strategies and Stock-Complex
Strategies (collectively complex strategies), including by indicating
that the Exchange may limit the applicable number of legs accepted for
each of these types of complex strategies, and to adopt separate
definitions for orders in those strategies (as opposed to quotes) so
that differences in processing are reflected more clearly in the
Exchange's Rules. Similarly, the Exchange believes specifying which
order types and designations contained in Rule 715 for regular orders
on the Exchange apply to Complex Orders and specifying any differences
with respect to the processing of Complex Orders within proposed Rule
722(b) will bring clarity to the available Complex Order types. The
added clarity will also assist

investors with determining which types of Complex Orders they can trade
on the Exchange in order to fully realize their trading and hedging
potential. With respect to Exposure Orders and Exposure Only Orders,
the Exchange believes it is reasonable to provide an opportunity for
investors to seek to have their orders exposed for an opportunity for
price improvement. Furthermore, the Exchange believes that it is
appropriate to give members the option to have such orders canceled if
they are not eligible for exposure (i.e., for Exposure Only Orders) or
have those orders entered on the complex order book (i.e., for Exposure
Orders) based on their trading needs. With respect to legging
orders,\64\ the Exchange believes that the proposed rule amendments
will more clearly articulate that only Complex Options Order strategies
can generate legging orders, and that a Reserve Complex Order will only
generate a legging order from its displayed quantity to avoid exposing
non-displayed size to market participants.
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    \64\ See Rule 715(k).
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    The Exchange also believes that specifying that bids and offers for
Complex Options Strategies may be expressed in $0.01 increments,\65\
and that the options legs of complex strategies may be executed in
$0.01 increments and not in ``any decimal price'' will remove any
confusion regarding the applicable increment that may have existed with
the current language that applied to all complex strategies. The rule
will continue to state that Stock-Option Strategies and Stock-Complex
Strategies are accepted in decimal increments, but the Exchange is
clarifying the permitted increments will be determined by the Exchange
with notice to its members.\66\ The Exchange believes that smaller
increments are appropriate for complex strategies that have a stock
component since the stock leg of such strategies are permitted to trade
in finer increments than permitted in the options market. The proposed
rule therefore gives the Exchange flexibility to adopt minimum
increments that are appropriate for the trading of these strategies.
Moreover, specifying the minimum trading increments for complex
strategies in the Supplementary Material to Rule 710 will remove any
potential confusion as to the application of Rule 710 to Complex
Orders.
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    \65\ See Rule 722(c)(1).
    \66\ The stock leg may be executed in any decimal price
permitted in the equity market.
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    The Exchange further believes that is it consistent with Section
6(b)(5) of the Act to provide greater clarity to the priority of
complex strategies with respect to bids and offers for the individual
component series on the Exchange by re-formatting Rule 722(b)(2)
(renumbered Rule 722(c)(2) under the proposal) and replacing certain
references with defined terms. The Exchange also believes that it is
consistent with the protection of investors and the public interest to
add language in Proposed Rule 722(c)(2)(iv) that explains that complex
strategies may be executed on the complex order book without giving
priority to the non-displayed portion of Reserve Orders on the bids or
offers for the individual legs of the complex strategy. As explained in
the purpose section of this proposed rule change, complex strategies
may be executed without giving priority to the non-displayed portion of
a Reserve Order in the regular market as this non-displayed interest
has no priority on the book, and is only available for execution after
all displayed interest has been executed. The Exchange believes that
the proposed changes to Rule 722(b)(3) (renumbered Rule 722(d) under
the proposal) regarding the execution of complex strategies will also
bring clarity to how complex strategies are executed. In particular,
the proposal specifies that complex strategies are not executable
unless the requirements of Rule 722(b)(2) (renumbered Rule 722(c)(2)
under the proposal), regarding the protection of Priority Customer
orders in the regular market, are satisfied, and more clearly
identifies the sequence of complex strategy processing.
    The Exchange also believes that providing for an auction process
whereby Complex Orders that improve upon the best price for the same
options strategy on the complex order book benefits such Complex Orders
by giving them an opportunity for price improvement, and that the
exposure process specified in the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act.\67\ The proposed
rule provides a fair opportunity for all members to participate in the
execution of such Complex Orders according to the existing execution
priority rules for Complex Orders. In particular, the Exchange notes
that the proposed rule does not exclude any market participants from
initiating or participating in the Complex Order auction and that all
of the material terms of the order are included in the broadcast
message. Additionally, the proposed rule assures that the exposure
process will not interrupt the processing of Complex Orders by
terminating the auction upon the receipt of certain Complex Orders for
the same complex strategy. Specifically, the exposure period for a
Complex Order will end immediately upon the receipt of a Complex Order
or quote for the same options strategy on either side of the market
that is marketable against the complex order book or bids and offers
for the individual legs, which assures that incoming orders are not
delayed by the exposure process. The exposure period for a Complex
Order will also be terminated upon the receipt of a non-marketable
Complex Order or quote for the same complex strategy on the same side
of the market that would cause the price of the Complex Order to be
outside of the best bid or offer for the same complex strategy on the
complex order book, which protects the Complex Order being exposed from
missing an execution opportunity. The Exchange further notes that
investors are given the ability to designate whether or not their
Complex Orders should be exposed for price improvement if eligible.
Thus, the proposed rule specifies a process designed to balance the
needs of investors that prefer an immediate execution and those that
prefer an opportunity for price improvement.
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    \67\ See Supplementary Material .01 to Rule 722.
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    The Exchange believes that specifying in Supplementary Material .03
to Rule 722 that market makers can enter quotes in classes selected by
the Exchange will enhance clarity for members and investors as the
Exchange has traditionally offered complex quoting functionality in
only a limited number of symbols. Although complex quoting
functionality has not yet been implemented on INET,\68\ the Exchange
intends to continue this practice when complex quoting is re-enabled.
Any classes selected by the Exchange for complex quoting are announced
to the membership via Options Trader Alert, and market makers can enter
Complex Orders in all classes regardless of whether quoting is
permitted. In addition, the Exchange believes that it is appropriate to
remove references to ``complex order strategies'' in the Market Maker
Speed Bump rule (i.e., Supplementary Material .04 to Rule 722) as the
proposed rules now contain a more specific definition of ``Complex
Options Strategies.'' Due to the nature of the Market Maker Speed Bump,
which is based exclusively on options contracts executed, this
protection applies only to Complex Options Strategies and not to
complex strategies that have a stock component--i.e.,

Stock-Option Strategies and Stock-Complex Strategies. The Exchange does
not believe that the stock and options components of a Stock-Option
Strategy or Stock-Complex Strategy can be combined in a way that
provides a meaningful measure of risk exposure for members, and has
therefore determined not to provide the Market Maker Speed Bump for
these complex strategies.
---------------------------------------------------------------------------

    \68\ See Securities Exchange Act Release No. 80613 (April 26,
2017), 82 FR 22022 (May 11, 2017) (SR-ISE-2017-37).
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    The Exchange believes that specifying in Rule 722(c)(3) that the
requirements of Rule 717(d) and (e) apply to the execution of Complex
Orders will provide clarity to members. The Exchange further believes
that moving the text related to the execution of Complex Orders in the
various crossing mechanisms into Supplementary Material .08 to Rule 722
will better enable members to understand how Complex Orders may be
executed in compliance with the requirements of Rule 717(d) and (e),
and that the proposed non-substantive changes to the existing text will
provided greater detail and clarity regarding how Complex Orders are
processed by the mechanisms. The Exchange also proposes to add
additional detail to the Supplementary Material .08 to Rule 722 to more
fully describe the operation of the Exchange's crossing mechanisms,
including but not limited to the prices at which Complex Orders can be
entered into the Complex Facilitation, Solicited Order, and Price
Improvement Mechanisms. These proposed changes reflect the current
operation of the Exchange's crossing mechanisms for Complex Orders, and
are intended to provide additional details as are customary for rules
today.
    As discussed in detail above, the Exchange also believes that the
proposed rule changes related to complex Customer Cross Orders \69\ and
complex QCCs--including Complex QCC Orders \70\ and Complex QCC with
Stock Orders \71\ where the Exchange attempts to facilitate the
execution of the stock component of the transaction to aid members in
meeting their compliance obligations--is consistent with all applicable
rules and with Section 6(b)(5) of the Act. Specifically, with respect
to complex Customer Cross Orders which are not subject to the general
principle of exposure, Priority Customer Orders on the Exchange for the
individual series are protected to the same extent as when any other
Complex Orders are executed on the complex order book. The Exchange
believes that in this context, where two Priority Customer Complex
Orders are being executed, it is reasonable and consistent with
existing rules to apply the requirements of Rule 722(b)(2) and (b)(3)
(renumbered Rule 722(c)(2) and 722(d) respectively). Indeed, it would
be contrary to investor expectations if entering a complex Customer
Cross Order reduced the opportunity for execution as compared to
entering two separate Priority Customer Orders on the complex order
book nearly simultaneously. In contrast, with respect to complex QCCs,
which are not limited to Priority Customer Orders and were narrowly
drawn to provide a limited exception to the general principle of
exposure, the Exchange believes it is necessary and appropriate to
restrict the execution if there are Priority Customer Orders on the
Exchange in the individual options series at the same price or if the
net price cannot be achieved at or within the NBBO for the individual
series. The Exchange further believes that the proposed rule change to
specify how complex Customer Cross Orders and complex QCCs are
processed in Supplementary Material .08 to Rule 722 will provide
clarity to members and investors.
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    \69\ See Supplementary Material .08(d) to Rule 722.
    \70\ See Supplementary Material .08(e) to Rule 722.
    \71\ See Supplementary Material .08(f) to Rule 722.
---------------------------------------------------------------------------

    Furthermore, the Exchange believes that it is consistent with the
protection of investors and the public interest to update its rules to
clarify in Supplementary Material .07(a) to Rule 722 how the stock leg
is considered when determining the best net price achievable from the
ISE bids and offers for the individual legs. Although it is clear what
this language means with respect to Complex Options Orders when the
bids and offers for the individual legs refer to interest on the
Exchange's regular order book, it is not currently clear with respect
to the stock leg of Stock-Option Orders and Stock-Complex Orders. The
stock leg of Stock-Option Orders and Stock-Complex Orders are permitted
to trade through the national best bid or offer pursuant to the QCT
exemption under Regulation NMS. To reinforce that these complex
strategies benefit from the QCT Exemption, the Exchange proposes in
Supplementary Material .13 to Rule 722 to provide that Members may only
submit Complex Orders and quotes in Stock-Option Strategies and Stock-
Complex Strategies if such Complex Orders and quotes comply with the
QCT exemption. Members submitting Complex Orders and quotes in Stock-
Option Strategies and Stock-Complex Strategies represent that they
comply with the QCT exemption. The Exchange believes that explaining
this in its rules will increase transparency around the operation of
the Exchange to the benefit of members and other market participants
that trade on the Exchange.
    With respect to Supplementary Material .07(d) to Rule 722, the
Limit Order Price Protection is designed to ensure that orders are
entered at prices that are reasonably related to the market. The
Exchange therefore believes that it is appropriate to use the national
best bid or offer price for this purpose, and is making it clear that
the national best bid or offer price of the stock leg is used for this
system protection.
    In addition, with respect to the other change to the Limit Order
Price Protection rules, the Exchange believes that the proposed rule
change will clarify how this system protection applies to Limit Complex
Orders to sell. As explained above, the proposed rule text more
accurately describes how the Exchange calculates the boundary prices
used to determine when Limit Complex Orders to sell will be rejected.
    The Exchange also believes that codifying the Trade Value Allowance
process in Supplementary Material .09 to Rule 722 will more accurately
describe how complex strategies are executed. The Chicago Board Options
Exchange (``CBOE'') also has similar rules for trading complex orders
in open outcry.\72\ Due to the rounding process, an order or quote for
a Stock-Option Strategy or Stock-Complex Strategy can trade through its
net price by an insignificant amount relative to the value of the
trade. Members generally prefer not to forgo an execution for their
Stock Option Strategies and Stock-Complex Strategies when there is a
Trade Value Allowance, as the amount of the rounding is miniscule
compared to the value of the trade. As explained earlier, the Trade
Value Allowance feature allows members to receive an expeditious
execution, and trade the stock and options components of a Stock-Option
Strategy or Stock-Complex Strategy in a moving market without
introducing legging risk. Without this functionality members would be
forced to resubmit their orders and potentially receive a much worse
price or miss an execution. While the Exchange believes that the
majority of members want their Stock-Option Strategies and Stock-
Complex Strategies to be handled this way, this functionality is
optional, giving members the ability to require strict enforcement of
the net price marked on the order; provided that any

Trade Value Allowance is permitted for auction orders pursuant to
Supplementary Material .08 to Rule 722 that do not trade solely with
their contra-side order in order to facilitate executions in these
mechanisms. Permitting any amount of Trade Value Allowance in these
limited circumstances ensures that an auction order that cannot trade
with its contra-side order due to better priced Responses or interest
on the Exchange's order books is not thereafter prohibited from
executing due to an economically insignificant amount of trade value
difference.
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    \72\ See Interpretations and Policies .01 to CBOE Rule 6.41,
which requires members to resolve similar trade value differences in
favor of the customer.
---------------------------------------------------------------------------

    The Exchange also believes that the codifying the Complex Opening
Process, Complex Opening Price Determination, and Complex Uncrossing
Process is designed to promote just and equitable principles of trade
because it will increase transparency with respect to the Exchange's
processes for opening and uncrossing complex strategies. The proposed
rules describe the Exchange's current process for opening complex
strategies, including provisions that describe eligible interest, the
calculation of an appropriate Opening Price at which such interest will
be executed, and allocation of contracts between market participants.
The Complex Opening Price Determination is designed to provide an
opportunity for members to trade complex strategies in a transparent
opening rotation at a price that is within the NBBO prices of the
individual legs prior to uncrossing the complex strategy in the Complex
Uncrossing Process to allow additional interest to participate. The
Exchange believes that codifying this process in the Exchange's
rulebook will be helpful to members and other market participants that
participate in the Complex Opening Price Determination. The proposed
rules also detail the Exchange's process for uncrossing the complex
order book when resting Complex Orders and quotes become executable
during regular trading or as part of the Complex Opening Process. The
Exchange believes that describing this process in its rules is helpful
to members and other market participants as it adds additional
information about how Complex Orders and quotes are executed when the
complex order book becomes executable, for example, due to updated
prices in market for the individual legs of the complex strategy. The
Exchange believes that the Complex Opening Process, Complex Opening
Price Determination, and Complex Uncrossing Process are each designed
to perfect the mechanism of a free and open market and a national
market system, and protect investors and the public interest.
    In addition, the Exchange further believes that the proposal
removes impediments to and perfects the mechanism of a free and open
market by ensuring that members, regulators and the public can more
easily navigate the Exchange's rulebook and better understand the types
of complex strategies available for trading on the Exchange and the
manner in which such strategies are traded. The Exchange believes the
proposed changes to the rules will benefit investors as they improve
the readability of and further simplify the Exchange's rules regarding
complex strategies. Similarly, the Exchange believes that the updates
to the rule references in Rule 722 to reflect the proposed renumbering
and expansion of rules will add further clarification to the Exchange's
rulebook, and will also alleviate potential confusion as to the
applicability of its rules, which will protect investors and the public
interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change
provides greater clarity regarding how complex strategies are processed
on the Exchange and expands upon various existing provisions within the
Exchange's rules. The Exchange notes that it operates in a highly
competitive market in which market participants can readily direct
order flow to competing venues who offer similar functionality. The
Exchange believes the proposed rule change will enhance competition
among the various markets for Complex Order execution, potentially
resulting in more active Complex Order trading on all exchanges. The
Exchange notes that as to intramarket competition, the proposed rule
change treats all Exchange participants equally, as fully described
above.