[Federal Register Volume 88, Number 154 (Friday, August 11, 2023)]
[Notices]
[Pages 54672-54685]
[FR Doc No: 2023-17208]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98066; File No. SR-ISE-2023-13]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend ISE Rules
Related to Complex Orders With Respect to a System Migration

August 7, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 25, 2023, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend Options 3, Section 7, Types of
Orders and Order and Quote Protocols; Options 3, Section 11, Auction
Mechanisms; Options 3, Section 12, Crossing Orders, Section 13, Price
Improvement Mechanisms for Crossing Transactions; Options 3, Section
14, Complex Orders; Options 3, Section 15, Simple Order Risk
Protections; and Options 3, Section 16, Complex Order Risk Protections.
    The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/ise/rules, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.

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

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

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

1. Purpose
    In connection with a technology migration to an enhanced Nasdaq,
Inc. (``Nasdaq'') functionality in 2024, the Exchange intends to adopt
certain trading functionality currently utilized at Nasdaq affiliate
exchanges. Also, the Exchange intends to remove certain functionality.
Specifically, the following sections would be amended: Options 3,
Section 7, Types of Orders and Order and Quote Protocols; Options 3,
Section 11, Auction Mechanisms; Options 3, Section 12, Crossing Orders,
Section 13, Price Improvement Mechanisms for Crossing Transactions;
Options 3, Section 14, Complex Orders; Options 3, Section 15, Simple
Order Risk Protections; and Options 3, Section 16, Complex Order Risk
Protections. Each change will be described below. The proposed stock-
tied functionality is identical to Phlx Options 3, Sections
13(b)(10)(ii) and 14(a)(i) with respect to utilizing NES to process and
report stock-tied functionality with two differences which are
explained in the proposal. Additionally, MRX recently adopted identical
rules to those proposed herein.\3\
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    \3\ See Securities Exchange Release Act No. 97726 (June 14,
2023), 88 FR 40344 (June 21, 2023) (SR-MRX-2023-10) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Complex Order Rules) (``SR-MRX-2023-10''). MRX's rules are not yet
operative.
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Stock-Related Strategies and Elimination of Trade Value Allowance
    Today, ISE Members are able to trade certain Stock-Option Orders as
described in ISE Options 3, Section 14(a)(2),\4\ Stock-Complex Orders
as described in ISE Options 3, Section 14(a)(3),\5\ Complex QCC with
Stock Orders as described in ISE Options 3, Section 14(b)(15),\6\ QCC
with Stock Orders \7\ as described in Options 3, Section 7(t) and
12(e), as described in Supplementary Material .03 of ISE Options 3,
Section 14 (``Delayed Functionalities'').\8\ Additionally, today, ISE
offers a Trade Value Allowance.\9\
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    \4\ The term ``Stock-Option Order'' refers to an order for a
Stock-Option Strategy as defined in Options 3, Section 14(a)(2). A
Stock-Option Strategy is the purchase or sale of a stated number of
units of an underlying stock or a security convertible into the
underlying stock (``convertible security'') coupled with the
purchase or sale of options contract(s) on the opposite side of the
market representing either (A) the same number of units of the
underlying stock or convertible security, or (B) the number of units
of the underlying stock necessary to create a delta neutral
position, but in no case in a ratio greater than eight-to-one
(8.00), where the ratio represents the total number of units of the
underlying stock or convertible security in the option leg to the
total number of units of the underlying stock or convertible
security in the stock leg. See ISE Options 3, Section 14(a)(2).
    \5\ The term ``Stock-Complex Order'' refers to an order for a
Stock-Complex Strategy as defined in Options 3, Section 14(a)(3). A
Stock-Complex Strategy is the purchase or sale of a stated number of
units of an underlying stock or a security convertible into the
underlying stock (``convertible security'') coupled with the
purchase or sale of a Complex Options Strategy on the opposite side
of the market representing either (A) the same number of units of
the underlying stock or convertible security, or (B) the number of
units of the underlying stock necessary to create a delta neutral
position, but in no case in a ratio greater than eight-to-one
(8.00), where the ratio represents the total number of units of the
underlying stock or convertible security in the option legs to the
total number of units of the underlying stock or convertible
security in the stock leg. Only those Stock-Complex Strategies with
no more than the applicable number of legs, as determined by the
Exchange on a class-by-class basis, are eligible for processing. See
ISE Options 3, Section 14(a)(3).
    \6\ A Complex QCC with Stock Order is a Qualified Contingent
Cross Complex Order, as defined in subparagraph (b)(6) of Options 3,
Section 14, entered with a stock component to be communicated to a
designated broker-dealer for execution pursuant to ISE Options 3,
Section 12(f).
    \7\ A QCC with Stock Order is a Qualified Contingent Cross
Order, as defined in Options 3, Section 7(j), entered with a stock
component to be communicated to a designated broker-dealer for
execution pursuant to Options 3, Section 12(e). See Options 3,
Section 7(t).
    \8\ See note 3 above.
    \9\ The Trade Value Allowance permits Stock-Option Strategies
and Stock-Complex Strategies at valid increments Options 3, Section
14(c)(1), Stock-Option Strategies and Stock-Complex Strategies to
trade outside of their expected notional trade value by a specified
amount, in order to facilitate the execution of the stock leg and
options leg(s). The Trade Value Allowance is the percentage
difference between the expected notional value of a trade and the
actual notional value of the trade. The amount of Trade Value
Allowance permitted may be determined by the Member, or a default
value determined by the Exchange and announced to Members; provided
that any amount of Trade Value Allowance is permitted in mechanisms
pursuant to Options 3, Sections 11 and 13 when auction orders do not
trade solely with their contra-side order. See Supplementary
Material .03 of ISE Options 3, Section 14.
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    At this time, in connection with a technology migration in 2024,
ISE proposes to amend its stock-tied

functionality. Today, ISE Members desiring to execute an order with
stock or an ETF component are required to enter into a brokerage
agreement with a broker-dealer designated by the Exchange and are
permitted to enter into such an agreement with one or more other
broker-dealers to which the Exchange is able to route stock orders.\10\
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    \10\ See Supplementary Material .02 to Options 3, Section 14.
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    The Exchange proposes to amend its rules to instead require that a
Member desiring to execute a Stock-Option Order or a Stock-Complex
Order enter into a brokerage agreement with Nasdaq Execution Services,
LLC (``NES'') which will execute the stock or ETF component of the
order.\11\ The stock component of a Qualified Contingent Cross
(``QCC'') with Stock Order or a Complex QCC with Stock Order will
continue to be handled by a third-party broker as provided in Options
3, Sections 12(e) and (f).\12\ NES is a broker-dealer owned and
operated by Nasdaq, Inc. NES, an affiliate of the Exchange, has been
approved by the Commission to become a Member of the Exchange and
perform inbound routing on behalf of the Exchange.\13\ Additionally,
NES is permitted to route outbound orders either directly or indirectly
through a third party routing broker-dealer to other market centers and
perform other functions regarding the cancellation of orders and the
maintenance of a NES error account.\14\
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    \11\ Id.
    \12\ ISE members may also trade QCC Orders and complex QCC
Orders. See Options 3, Section 12(c) and (d). For those orders, the
parties to the trade will arrange for the execution of the stock
component of the order.
    \13\ See Securities Exchange Act Release No. 79994 (February 9,
2017), 82 FR 10837 (February 15, 2017) (SR-ISE-2016-27) (Order
Granting Approval of Proposed Rule Changes, as Modified by Amendment
No. 1 Thereto, To Amend the Exchange's Rules Regarding Routing of
Orders, Cancellation of Orders, and Handling of Error Positions, and
Permit Nasdaq Execution Services, LLC To Become an Affiliated Member
of the Exchange To Perform Certain Routing and Other Functions).
    \14\ Id. ISE is subject to certain limitations and conditions
such as maintaining a Regulatory Services Agreement with FINRA, as
well as an agreement pursuant to Rule 17d-2 under the Act, among
other limitations and conditions.
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    NES currently acts as agent for orders to buy and sell the
underlying stock or ETF component of a Complex Order on Nasdaq Phlx LLC
(``Phlx'').\15\ The functions performed by NES on Phlx today are
identical to the functions that ISE proposes for NES to perform for ISE
Members as well as rules recently adopted by MRX.\16\ Identical to
Phlx, after ISE's System determines that a Complex Order execution is
possible and identifies the prices for each component of such Complex
Order, ISE will electronically communicate the stock or ETF component
of the Complex Order to NES for execution.\17\ NES, acting as agent for
the orders to buy and sell the underlying stock or ETF, will execute
the orders in the over-the-counter (``OTC'') market and will handle the
orders pursuant to applicable rules regarding equity trading, including
the rules governing trade reporting, trade-throughs, and short sales.
This function is currently performed by a third-party broker-dealer.
The proposed stock-tied functionality is identical to Phlx Options 3,
Sections 13(b)(10)(ii) and 14(a)(i) with respect to utilizing NES to
process and report the stock or ETF component of a Complex Order.
However, there are two differences in the way Phlx and ISE handle
stock-tied option orders.
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    \15\ See Phlx Options 3, Sections 13(b), 14(a) and 16(b).
    \16\ See Securities Exchange Act Release No. 63777 (January 26,
2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-2010-157) (Order
Approving a Proposed Rule Change, as Modified by Amendment Nos. 1
and 2, Relating to Complex Orders) (``Phlx Complex Order
Approval''). NES assumed the stock execution functionalities that
were previously performed by NOS. Phlx subsequently filed to permit
both inbound and outbound orders to be routed through NES instead of
Nasdaq Options Services LLC (``NOS''). See Securities Exchange Act
Release No. 71417 (January 28, 2014), 79 FR 6253 (February 3, 2014)
(SR-Phlx-2014-04) (Notice of Filing and Immediate Effectiveness of
Proposed Rule Change to Outbound Routing) and 71416 (January 28,
2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to
Inbound Routing of Options Orders). See also SR-MRX-2023-10 which
rules are not yet operative.
    \17\ See proposed Supplementary Material .08(b) to Options 3,
Section 11, proposed Options 3, Section 12(b)(2), proposed
Supplementary Material .09(b) to Options 3, Section 13, proposed
Supplementary Material .02 to Options 3, Section 14 and proposed
Options 3, Section 16(d). See also Phlx Options 3, Section
13(b)(10)(ii), Options 3, Section 16(b).
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    First, while both Phlx and ISE have certain risk protections for
complex orders, they differ. With respect to ISE, the execution price
of the Complex Order must be within a certain price from the current
market, as determined by the Exchange pursuant to Options 3, Section
16(a). Specifically, today, ISE Options 3, Section 16(a) provides that
the System will not permit any leg of a complex strategy to trade-
through the NBBO for the series or any stock component by a
configurable amount calculated as the lesser of (i) an absolute amount
not to exceed $0.10, and (ii) a percentage of the NBBO not to exceed
500%, as determined by the Exchange on a class, series or underlying
basis. In contrast, Phlx Options 3, Section 16(b)(i) describes Phlx's
Acceptable Complex Execution (``ACE'') Parameter which defines a price
range outside of which a complex order will not be executed. On Phlx, a
complex order to sell is not executed at a price that is lower than the
cNBBO \18\ bid by more than the ACE Parameter. Conversely, on Phlx, a
complex order to buy will not be executed at a price that is higher
than the cNBBO offer by more than the ACE Parameter. While ISE's and
Phlx's price checks differ, both markets seek to prevent executions
from occurring at certain prices and at certain percentages from the
NBBO. ISE's proposal would require NES to apply the same price check
for stock-tied functionality that are being applied today by a third-
party broker-dealer that executed the stock or ETF component of a
complex strategy on behalf of ISE Members. ISE Members would continue
to be subject to the same price check which is applied to all Complex
Orders executed on ISE.
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    \18\ The term ``cNBBO'' means the best net debit or credit price
for a Complex Order Strategy based on the NBBO for the individual
options components of a Complex Order Strategy, and, where the
underlying security is a component of the Complex Order, the
National Best Bid and/or Offer for the underlying security. See Phlx
Options 3, Section 14(a)(vi).
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    Second, ISE and Phlx differ with respect to the manner in which
their systems handle Stock-Option Strategies and Stock-Complex
Strategies that would execute against interest on the Complex Order
Book at a price that does not meet the price checks in their respective
rules or do not meet Regulation SHO provisions as provided for in
proposed Options 3, Section 16(e) \19\ are handled by their respective
systems. As proposed, ISE will hold orders on the Complex Order book
that cannot be executed because of Regulation SHO or price check
restrictions, unless the Member requests the order to be cancelled. If
an ISE Member elects to have the order held on the Complex Order Book,
the order would await other matching opportunities, otherwise at the
Member's election the order would be returned to the Member. In
contrast, Phlx only provides for a cancellation of the order. ISE's
proposed approach would provide the Member with optionality as to the
handing of the order. The Exchange believes providing the choice to
have the order held on the Complex Order Book provides Members with an
opportunity for an execution.
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    \19\ As proposed, NES will only execute Stock-Option Strategies
and Stock-Complex Strategies if the underlying covered security
component is in accordance with Rule 201 of Regulation SHO.
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NES
    NES is a registered broker-dealer and member of various exchanges
and the Financial Industry Regulatory Authority

(``FINRA''). NES will be responsible for the proper execution, trade
reporting, and submission to clearing of the underlying stock or ETF
component of a Complex Order.\20\ Because these trades will occur off-
exchange, the principal regulator is FINRA. Furthermore, today, NES is
responsible for compliance with FINRA rules generally and is subject to
examination by FINRA. Specifically, NES is subject to FINRA Rule 3110,
which generally requires that the policies and procedures and
supervisory systems of a broker-dealer be reasonably designed to
achieve compliance with applicable securities laws and regulations and
with applicable FINRA rules, including those relating to the misuse of
material non-public information. To this end, today, NES has in place
policies related to confidentiality and the potential for informational
advantages relating to its affiliates, intended to protect against the
misuse of material nonpublic information.\21\ In particular, NES will
have in place policies and procedures designed to prevent the misuse of
material non-public information related to stock-tied executions. Of
note, NES only receives information about the stock or ETF portion of
the order from the Exchange. As mentioned herein, today, NES is
responsible for the proper execution, trade reporting, and submission
to clearing of the underlying stock or ETF component of a Complex Order
on Phlx. ISE will adopt identical policies and procedures for its
stock-tied functionality as are in place on Phlx today.
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    \20\ The Commission's approval order for Phlx stated that NOS
(now NES) ``. . . as a facility of the Phlx, NOS is subject to
oversight by the Commission and by the Phlx. In addition, NOS, a
member of FINRA, is responsible for compliance with applicable rules
regarding equity trading, including rules governing trade reporting,
trade-throughs and short sales, and is subject to examination by
FINRA. Because NOS will execute the stock or ETF component of a
Complex Order in the OTC market, the principal regulator of these
trades will be FINRA, rather than the Phlx or Nasdaq.'' See SR-Phlx-
2010-157 76 FR 5630 at 5625, footnote 20. Phlx originally set up its
affiliated broker-dealers as two separate entities, NES and NOS.
When Phlx replaced NOS with NES, it noted in the rule change that
NES will operate the same way as NOS operated, in terms of routing
options orders to destination options exchanges. See SR-Phlx-2014-
04, 79 FR 6253 at 6254.
    \21\ Similarly, the Exchange does establish and maintain
procedures and internal controls reasonably designed to adequately
restrict the flow of confidential and proprietary information
between the Exchange and NES. Additionally NES undertook all NOS'
responsibilities with respect to the execution and reporting of the
underlying security component of a Complex Order. See SR-Phlx-2014-
04 at note 20. Therefore, members of FINRA or the NASDAQ Stock
Market (``NASDAQ'') who were required to have a Uniform Service
Bureau/Executing Broker Agreement (``AGU'') with NOS in order to
trade Complex Orders containing a stock/ETF component and firms that
are not members of FINRA or NASDAQ who were required to have a
Qualified Special Representative (``QSR'') arrangement with NOS in
order to trade Complex Orders containing a stock/ETF component were
required to have such arrangements with NES. See Securities Exchange
Act Release No. 71417 (January 28, 2014), 79 FR 6253 (February 3,
2014) (SR-Phlx-2014-04) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change to Outbound Routing) and 71416
(January 28, 2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05)
(Notice of Filing and Immediate Effectiveness of Proposed Rule
Change to Inbound Routing of Options Orders).
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    In addition, because the execution and reporting of the stock/ETF
piece will occur otherwise than on ISE or any other exchange, it will
be handled by NES pursuant to applicable rules regarding equity
trading,\22\ including the rules governing trade reporting, trade-
throughs and short sales. Specifically, NES will report the trades to
the Trade Reporting Facility.\23\ Firms that are members of FINRA are
required to have a Uniform Service Bureau/Executing Broker Agreement
(``AGU'') with NES in order to trade Complex Orders containing a stock/
ETF component. Firms that are not members of FINRA are required to have
a Qualified Special Representative (``QSR'') arrangement with NES in
order to trade Complex Orders containing a stock/ETF component. This
requirement is codified in proposed Supplementary Material .08 to
Options 3, Section 11, proposed Options 3, Section 12(b)(1), proposed
Supplementary Material .09 to Options 3, Section 13 and proposed
Supplementary Material .07 to Options 3, Section 14. Accordingly, this
process is available to all ISE Members and the stock/ETF component of
a Complex Order, once executed, will be properly processed for trade
reporting purposes. Phlx has identical requirements within its Options
3, Sections 13(b)(10) and 14(a)(i).
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    \22\ Once the orders are communicated to the broker-dealer for
execution, the broker-dealer has complete responsibility for
determining whether the orders may be executed in accordance with
all of the rules applicable to execution of equity orders.
    \23\ Specifically, the trades will be reported to the FINRA/
Nasdaq TRF which is a facility of FINRA that is operated by Nasdaq,
Inc. and utilizes Automated Confirmation Transaction (``ACT'')
Service technology.
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    With respect to trade-throughs, the Exchange believes that the
stock/ETF component of a Complex Order is eligible for the Qualified
Contingent Trade Exemption from Rule 611(a) of Regulation NMS. A
Qualified Contingent Trade is a transaction consisting of two or more
component orders, executed as agent or principal, that satisfy the six
elements in the Commission's order exempting Qualified Contingent
Trades (``QCTs'') from the requirements of Rule 611(a),\24\ which
requires trading centers to establish, maintain, and enforce written
policies and procedures that are reasonably designed to prevent trade-
throughs.\25\ The Exchange believes that the stock/ETF portion of a
Complex Order under this proposal complies with all six requirements.
Moreover, as explained below, ISE's System will validate compliance
with each requirement such that any matched order received by NES under
this proposal has been checked for compliance with the exemption, as
follows:
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    \24\ 17 CFR 242.611(a).
    \25\ See Securities Exchange Act Release Nos. 57620 (April 4,
2008), 73 FR 19271 (April 9, 2008) (``QCT Exemptive Order''). See
also Securities Exchange Act Release No. 54389 (August 31, 2006), 71
FR 52829 (September 7, 2006). The QCT Exemption applies to trade-
throughs caused by the execution of an order involving one or more
NMS stocks that are components of a ``qualified contingent trade.''
As described more fully in the QCT Exemptive Order, a qualified
contingent trade is a transaction consisting of two or more
component orders, executed as principal or agent, where: (1) At
least one component order is an NMS stock; (2) all components are
effected with a product or price contingency that either has been
agreed to by the respective counterparties or arranged for by a
broker-dealer as principal or agent; (3) the execution of one
component is contingent upon the execution of all other components
at or near the same time; (4) the specific relationship between the
component orders (e.g., the spread between the prices of the
component orders) is determined at the time the contingent order is
placed; (5) the component orders 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 since cancelled; and
(6) the Exempted NMS Stock Transaction is fully hedged (without
regard to any prior existing position) as a result of the other
components of the contingent trade.

    (1) At least one component order is in an NMS stock: The stock/
ETF component must be an NMS stock, which is validated by the
System;
    (2) all components are effected with a product or price
contingency that either has been agreed to by the respective
counterparties or arranged for by a broker-dealer as principal or
agent: A Complex Order, by definition consists of a single net/debit
price and this price contingency applies to all the components of
the order, such that the stock price computed and sent to NES allows
the stock/ETF order to be executed at the proper net debit/credit
price based on the execution price of each of the option legs, which
is determined by the ISE System;
    (3) the execution of one component is contingent upon the
execution of all other components at or near the same time: Once a
Complex Order is accepted and validated by the System, the entire
package is processed as a single transaction and each of the option
leg and stock/ETF components are simultaneously processed;

    (4) the specific relationship between the component orders
(e.g., the spread between the prices of the component orders) is
determined at the time the contingent order is placed: Complex
Orders, upon entry, must have a size for each component and a net
debit/credit, which the System validates and processes to determine
the ratio between the components; an order is rejected if the net
debit/credit price and size are not provided on the order;
    (5) the component orders 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 since cancelled:
under this proposal, the stock/ETF component must be the underlying
security respecting the option legs, which is validated by the
System; and
    (6) the transaction is fully hedged (without regard to any prior
existing position) as a result of the other components of the
contingent trade: Under this proposal, the ratio between the options
and stock/ETF must be a conforming ratio (8 contracts per 100
shares), which the System validates, and which under reasonable risk
valuation methodologies, means that the stock/ETF position is fully
hedged.\26\
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    \26\ A trading center may demonstrate that an Exempted NMS Stock
Transaction is fully hedged under the circumstances based on the use
of reasonable risk-valuation methodologies. The release approving
the original exemption stated: To effectively execute a contingent
trade, its component orders must be executed in full or in ratio at
its predetermined spread or ratio. ``In ratio'' clarifies that
component orders of a contingent trade do not necessarily have to be
executed in full, but any partial executions must be in a
predetermined ratio.

    Furthermore, proposed Supplementary Material .08 to Options 3,
Section 11, proposed Options 3, Section 12(b)(1), proposed
Supplementary Material .09 to Options 3, Section 13 and proposed
Supplementary Material .07 to Options 3, Section 14 provide that
Members may only submit Complex Orders with a stock/ETF component if
such orders comply with the Qualified Contingent Trade Exemption.
Members submitting such Complex Orders with a stock/ETF component
represent that such orders comply with the Qualified C vontingent Trade
Exemption. Thus, the Exchange believes that Complex Orders consisting
of a stock/ETF component will comply with the exemption and that ISE's
System will validate such compliance to assist NES in carrying out its
responsibilities as agent for these orders.
    With respect to short sale regulation, the proposed handling of the
stock/ETF component of a Complex Order under this proposal should not
raise any issues of compliance with the currently operative provisions
of Regulation SHO.\27\ When a Complex Order has a stock/ETF component,
Members must indicate, pursuant to Regulation SHO, whether that order
involves a long or short sale. The System will accept Complex Orders
with a stock/ETF component marked to reflect either a long or short
position; specifically, orders not marked as buy, sell or sell short
will be rejected by ISE's System.\28\ The System will electronically
deliver the stock/ETF component to NES for execution. Simultaneous to
the options execution on ISE's System, NES will execute and report the
stock/ETF component, which will contain the long or short indication as
it was delivered by the Member to ISE's System. Accordingly, NES, as a
trading center under Rule 201, will be compliant with the requirements
of Regulation SHO. Of course, broker-dealers, including both NES and
the Members submitting orders to ISE with a stock/ETF component, must
comply with Regulation SHO. NES' compliance team updates, reviews and
monitors NES' policies and procedures including those pertaining to
Regulation SHO on an annual basis.
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    \27\ 17 CFR 242.200 et seq.
    \28\ The Exchange also accepts short sell exempt orders as
described herein.
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    Further, proposed Supplementary Material .08(c) to Options 3,
Section 11, and proposed Options 3, Section 12(b)(3), proposed
Supplementary Material .09(c) to Options 3, Section 13, and proposed
Options 3, Section 16(e) provide that when the short sale price test in
Rule 201 of Regulation SHO \29\ is triggered for a covered security,
NES will not execute a short sale order in the underlying covered
security component \30\ of a Complex Order if the price is equal to or
below the current national best bid. However, NES will execute a short
sale order in the underlying covered security component of a Complex
Order if such order is marked ``short exempt,'' regardless of whether
it is at a price that is equal to or below the current national best
bid. If NES cannot execute the underlying covered security component of
a Complex Order in accordance with Rule 201 of Regulation SHO, the
Exchange will hold the Complex Order on the Complex Order Book, if
consistent with Member instructions (Members may always elect to cancel
the order).\31\ The order may execute at a price that is not equal to
or below the current national best bid.\32\ This proposed rule is
similar to Phlx Options 3, Section 16(b) except that unlike Phlx, ISE
will not cancel back the Complex Order to the entering Member unless
the Member requests that the order be cancelled. As noted above, ISE
and Phlx differ with respect to the manner in which their systems
handle Stock-Option Strategies and Stock-Complex Strategies that do not
meet requisite price checks in their respective rules or do not meet
the requirements of Regulation SHO. As proposed, ISE will hold orders
on the Complex Order book that cannot be executed pursuant to
Regulation SHO restrictions, unless the Member requests the order to be
cancelled.\33\ If an ISE Member elects to have the order held, the
order would await other matching opportunities, otherwise at the
Member's election the order would be returned to the Member. In
contrast, Phlx only provides for a cancellation of the order. ISE's
proposed approach would provide the Member with optionality as to the
handing of the order. The Exchange believes providing the choice to
have the order held provides Members with an opportunity for an
execution.
---------------------------------------------------------------------------

    \29\ See Securities Exchange Act Release No. 61595 (February 26,
2010), 75 FR 11232 (March 10, 2010) (``Rule 201 Adopting Release'').
    \30\ For purposes of this paragraph, the term ``covered
security'' shall have the same meaning as in Rule 201(a)(1) of
Regulation SHO.
    \31\ See proposed Options 3, Section 16(e). In contrast, Complex
Orders in an auction mechanism that cannot be executed in accordance
with Regulation SHO will be cancelled back and will not rest on the
Complex Order Book as provided in Supplementary Material .08 to
Options 3, Section 11 and Supplementary Material .09 to Options 3,
Section 13.
    \32\ See proposed Options 3, Section 16(e).
    \33\ See proposed Options 3, Section 16(e).
---------------------------------------------------------------------------

    For these reasons, the processing of the stock/ETF component of a
Complex Order under this proposal will comply with applicable rules
regarding equity trading, including the rules governing trade
reporting, trade-throughs and short sales. NES's responsibilities
respecting these equity trading rules will be documented in NES's
written policies and procedures. NES' compliance team updates, reviews
and monitors NES' policies and procedures regarding equity trading
rules on an annual basis. NES is regulated by FINRA and as such, NES
policies and procedures are subject to review and examinations by
FINRA.
    As part of the execution of the stock/ETF component, NES will
ensure that the execution price is within the intra-day high-low range
for the day in that stock at the time the Complex Order is processed
and within a certain price range from the current market pursuant to
Options 3, Section 16(a),\34\ which the Exchange will establish in an
Options Trader Alert. If the stock price is not

within these parameters, the Complex Order is not executable and would
be held on the order book or cancelled, consistent with Member
instructions.\35\ Today, the third-party broker-dealer would ensure the
execution price is within the intra-day high-low range. With the
transition to NES, the Exchange would commence performing this check.
Members who transact stock-tied functionality on ISE would therefore
continue to be subject to the same execution price check with NES as
today.
---------------------------------------------------------------------------

    \34\ This intra-day high-low range check does not occur for
Complex PIM Orders, Complex Facilitation Orders and Complex SOM
Orders, and also does not occur for Complex Customer Cross Orders.
    \35\ See proposed Options 3, Section 16(d). In contrast, Complex
Orders in an auction mechanism that cannot be executed in accordance
with Regulation SHO will be cancelled back and will not rest on the
Complex Order Book as provided in Supplementary Material .08 to
Options 3, Section 11 and Supplementary Material .09 to Options 3,
Section 13.
---------------------------------------------------------------------------

    The Exchange believes that the continued electronic submission of
the stock/ETF piece of the Complex Order to NES for execution should
help ensure that the Complex Order, as a whole, is executed timely and
at the desired price. In addition, the Exchange's electronic
communication of the stock or ETF component to NES for execution
eliminates the need for each party to separately submit the stock
component to a broker-dealer for execution. The execution of the stock/
ETF portion of a Complex Order will be immediate; the Exchange's System
will calculate the stock price based on the net debit/credit price of
the Complex Order,\36\ while also calculating and determining the
appropriate options price(s), all electronically. The Exchange
continues to believe that this practice would not require the Exchange
to later nullify options trades if the stock price cannot be achieved.
Accordingly, like Phlx, the Exchange is not proposing to adopt a rule
permitting such option trade nullifications because the trade would not
occur at a price that later required nullification due to the
unavailability of the stock/ETF price. The Exchange further believes
that the certainty associated with such electronic calculations and
processing will continue to be an attractive feature for Members
transacting Complex Orders with a stock or ETF component. Likewise,
Phlx does not have a rule for options trade nullification for similar
transactions. Phlx reasoned in its proposal to similarly use an
affiliate to execute the stock or ETF component of a Complex Order that
because such execution would be immediate, with Phlx's system
calculating the stock or ETF price based on the net debit/credit price
of the Complex Order while also calculating and determining the
appropriate options price(s), that it believed that its approach would
not require Phlx to later nullify options trades if the stock price
cannot be achieved.\37\
---------------------------------------------------------------------------

    \36\ The stock/ETF price is, of course, included within the net
debit/credit price of the Complex Order.
    \37\ See Phlx Complex Order Approval supra at 5633.
---------------------------------------------------------------------------

    The Exchange also believes that it is appropriate to construct a
program wherein its affiliate, NES, is the exclusive conduit for the
execution of the stock/ETF component of a Complex Order under this
proposal, similar to Phlx.\38\ As a practical matter, complex order
programs on other exchanges involve specific arrangements with a
broker-dealer to facilitate prompt execution. NES does not intend to
charge a fee for the execution of the stock/ETF component of a Complex
Order.\39\ The Exchange believes that is consistent with the Act for
such an arrangement to involve one broker-dealer, even one that is an
affiliate, particularly to offer the aforementioned benefits of a
prompt, electronic execution for Complex Orders involving stock/ETFs.
Specifically, offering a seamless, automatic execution for both the
options and stock/ETF components of a Complex Order is an important
feature that should promote just and equitable principles of trade and
remove impediments to and perfect the mechanism of a free and open
market and a national market system by deeply enhancing the sort of
complex order processing available on options exchanges today.
Nevertheless, Members could, in lieu of this proposed arrangement with
NES, choose, instead, the following alternatives: (i) avoid using
Complex Orders that involve stock/ETFs, (ii) use a trading floor to
execute Complex Order with stock, or (iii) go to another options venue,
several of which offer a similar feature.\40\
---------------------------------------------------------------------------

    \38\ See ISE General 2, Section 4(b) which provides that Nasdaq,
Inc., which owns NASDAQ Execution Services, LLC and the Exchange,
shall establish and maintain procedures and internal controls
reasonably designed to ensure that NASDAQ Execution Services, LLC
does not develop or implement changes to its system on the basis of
non-public information regarding planned changes to the Exchange's
systems, obtained as a result of its affiliation with the Exchange,
until such information is available generally to similarly situated
Exchange Members in connection with the provision of inbound routing
to the Exchange.
    \39\ However, Trade Reporting Facility and clearing fees, not
charged by ISE or NES, may result. National Securities Clearing
Corporation (``NSCC'') and ACT will bill firms directly for their
use of the NSCC and ACT systems, respectively. To the extent that
NES is billed by NSCC or ACT, it will not pass through such fees to
firms for the stock/ETF portion of a Complex Order under this
proposal. ISE's fees applicable to Complex Orders appear in its Fee
Schedule and may change from time to time.
    \40\ Existing Complex Order mechanisms at Cboe, Inc. (``Cboe'')
offers a similar end result. See Cboe 5.33(l).
---------------------------------------------------------------------------

    In line with the proposed amendments, the Exchange proposes to
remove language within Supplementary Material .02 of Options 3, Section
14 which states,

    Members may also indicate preferred execution brokers, and such
preferences will determine order routing priority whenever possible.
A trade of a Stock-Option Order or a Stock-Complex Order will be
automatically cancelled if market conditions prevent the execution
of the stock or option leg(s) at the prices necessary to achieve the
agreed upon net price. When a Stock-Option Order or Stock-Complex
Order has been matched with another Stock-Option Order or Stock-
Complex Order that is for less than the full size of the Stock-
Option Order or Stock-Complex Order, the full size of the Stock-
Option Order or Stock Complex Order being processed by the stock
execution venue will be unavailable for trading while the order is
being processed.

    As noted herein, Members will no longer be able to indicate
preferred execution brokers which makes the first sentence within
Supplementary Material .02 of Options 3, Section 14 unnecessary. The
second sentence within Supplementary Material .02 of Options 3, Section
14 is being removed because the Exchange is replacing this rule text
with proposed Options 3, Section 16(d) and (e) which describes price
checks that will be performed for Stock-Option Orders or Stock-Complex
Orders by NES. The third sentence within Supplementary Material .02 of
Options 3, Section 14 is being removed because the Exchange's proposal
to replace the third-party broker with NES will remove a delay that
currently exists in the workflow to process a Stock-Option Order or
Stock-Complex Order. NES will perform the stock leg validations
proposed in Options 3, Sections 16(d) and (e) for Stock-Option Orders
or Stock-Complex Orders. Thereafter, NES would print the stock
components onto the Trade Reporting Facility and ISE would print the
option component executions. This new workflow in which the stock or
ETF component of the order will be routed to NES for execution instead
of a third-party broker-dealer will obviate the possibility that the
stock execution venue will be unavailable for trading while the order
is being processed because ISE would no longer be reliant on a third-
party broker-dealer to conduct the appropriate checks and, thereafter,
relay information to ISE. With the proposed change, NES, the

Exchange's affiliate, would conduct the necessary price checks and
would make Stock-Option Orders or Stock-Complex Orders available to ISE
in the same way that it does for Phlx. The Exchange believes that this
new workflow would increase the efficiency of the entire transaction,
including stock component validation and reporting.
Complex Opening Process
    Similarly, the Exchange proposes to amend Supplementary Material
.04 to Options 3, Section 14 to provide that Stock-Option Strategies
and Stock-Complex Strategies will open pursuant to the Complex Opening
Price Determination described in Supplementary Material .05 to Options
3, Section 14 instead of the Complex Uncrossing Process described in
Supplementary Material .06(b) to Options 3, Section 14. Similar to the
discussion above, the applicable price checks for the stock/ETF
component of a Stock-Option Strategy and Stock-Complex Strategy are
being performed by a third-party broker-dealer, which causes a delay
that prevents these strategies from participating in the Complex
Opening Process. With the proposed change to utilize NES in lieu of a
third-party broker-dealer, Stock-Option Strategies and Stock-Complex
Strategies would be able to participate in the Complex Opening Process
because there would be no delay as NES, the Exchange's affiliate, would
conduct the necessary checks (i.e. the price checks Options 3, Section
16(d) and (e)). Thereafter, NES would make Stock-Option Order or Stock-
Complex Order available to participate in the Complex Opening Process.
    For example, assume that an underlying equity is in a Regulation
SHO State, the underlying equity component is open on the primary
underlying market, and the following strategy is created prior to the
option leg being opened on ISE:

[ssquf] Assume Stock Option Strategy: Buy 8 puts and buy 100 shares
[ssquf] Stock Leg NBBO: 50.00 x 50.20
[ssquf] Option leg opens on ISE and the NBBO is 2.00 x 2.10
[ssquf] Stock-Option Strategy derived NBBO: 16.50 x 16.75 \41\
---------------------------------------------------------------------------

    \41\ The derived NBBO for the Stock Option Strategy was
calculated as follows: Stock Option Strategy Derived Bid = \1/
4\(2.00 x 8) + \1/4\(50) = 16.50 and Stock Option Strategy Derived
Offer = \1/4\(2.10 x 8) + \1/4\(50.20) = 16.75. The Stock Option
Strategy is normalized by ISE's System by dividing the legs by the
greatest common denominator of four (4). The normalized ratio was
applied to the option leg price and stock leg price to determine the
net price strategy.
---------------------------------------------------------------------------

[ssquf] Firm A Customer Stock-Option Order to buy 5 strategies for
16.50 arrives
[ssquf] Firm B Stock-Option Order to buy 5 strategies for 16.50 arrives
[ssquf] Firm C Stock-Option Order to sell 7 strategies for 16.50
arrives with instructions to short the stock component
[ssquf] Firm D Stock-Option Order to sell 3 strategies for 16.50
arrives with instructions to Sell the Stock component

    In the above scenario, only Firm A (buying 5 strategies) and Firm D
(not shorting 3 strategies) can actually trade at the Opening Price
despite it appearing there is a fully matched cross. Firm C (selling 7
strategies) cannot trade because the underlying is in a Regulation SHO
state and the only price the stock leg can be matched at, is on the
National Best Bid, which is not a permissible price to short sell for
an underlying in a Regulation SHO state.
    ISE does not attempt to match Stock-Option Orders and Stock-Complex
Orders during the Complex Opening Price Determination because the
Exchange cannot ensure that all parties in the cross are able to match
at the proposed stock leg price because the checks are performed by a
third party. If the third party is unable to match part of the cross,
executions on the options components are busted, therefore the Exchange
does not consider Stock-Option Orders and Stock-Complex Orders in the
Complex Opening.
    With this proposal, the price checks would be conducted by NES, an
affiliate of the Exchange. Once ISE determines the stock and option leg
prices, ISE will communicate the stock price and quantity to NES, who
will conduct the necessary price checks. The proposed workflow provides
efficiencies for the stock component execution as compared to the
current process which involves a third-party broker-dealer. With this
process, ISE would be able to process the option component and match
the strategies during the Complex Opening Price Determination without
the need for ISE to await a response from a third-party broker-dealer.
    The ability to attempt this match opportunity earlier in the
Complex Opening Price Determination is critical because the market can
move between the Complex Opening Price Determination and the Complex
Uncrossing Process \42\ in such a way that the trade could no longer be
possible. By way of example, if the Stock Component adjusts to 53.00 x
54.00 before this strategy can attempt a Complex Uncrossing Process,
the Stock Option Strategy derived NBBO would be 17.25 x 17.70 and there
would no longer be a match possible for the interest willing to buy and
sell at 16.50. If the System instead had utilized the Opening Price
Determination, the execution would have occurred in this instance.
---------------------------------------------------------------------------

    \42\ See Supplementary Material .06 to ISE Options 3, Section
14.
---------------------------------------------------------------------------

Trade Value Allowance
    Trade Value Allowance is a functionality that allows Stock-Option
Strategies and Stock-Complex Strategies to trade outside of their
expected notional trade value by a specified amount (the ``Trade Value
Allowance'').\43\ After calculating the appropriate options match price
for a Stock-Option or Stock-Complex Order expressed in a valid one cent
increment, the System calculates the corresponding stock match price
rounded to the increment supported by the equity market.
---------------------------------------------------------------------------

    \43\ The Trade Value Allowance is the percentage difference
between the expected notional value of a trade and the actual
notional value of the trade. See Supplementary Material .03 of ISE
Options 3, Section 14.
---------------------------------------------------------------------------

    The Exchange no longer desires to offer the Trade Value Allowance.
The Exchange will issue an Options Trader Alert indicating its intent
to decommission this functionality to provide notice to Members.\44\
Very few Members have opted to utilize the Trade Value Allowance and
even a smaller percentage of trades were subject to the allowance. Phlx
does not have a similar allowance today. In an effort to harmonize its
complex order functionality across its Nasdaq affiliated markets, the
Exchange proposes to no longer offer the Trade Value Allowance
functionality. With the proposed change to utilize NES, the Exchange
would determine the stock leg prices, and NES would be able to execute
the stock leg at two different prices to ensure that the net price of
the execution is within the notional value of the original order, thus
eliminating the need for the allowance.
---------------------------------------------------------------------------

    \44\ MRX issued such an alert indicating it would when it
decommissioned its Trade Value Allowance. See Options Trader Alert
#2023-3. See also SR-MRX-2023-10. No MRX Member expressed concern
with this functionality being eliminated.
---------------------------------------------------------------------------

Options 3, Section 7
    The Exchange proposes to make a clarifying change to ISE Options 3,
Section 7, Types of Orders and Order and Quote Protocols. The Exchange
proposes to amend ISE Options 3, Section 7(t) related to QCC with Stock
Orders to make clear that QCC with Stock Orders may only be entered

through FIX \45\ and Precise.\46\ ISE has 3 order entry protocols, FIX,
OTTO \47\ and Precise. Members only require one order entry protocol to
enter orders onto ISE. While Members only require one order entry port
to submit orders into ISE, the Exchange offers Members a choice between
2 different types of ports to utilize to submit QCC with Stock
Orders.\48\ All Members would have the ability to enter QCC with Stock
Orders through FIX or Precise. Members are not required to subscribe to
both FIX and Precise. QCC with Stock Orders may not be entered through
OTTO.
---------------------------------------------------------------------------

    \45\ ``Financial Information eXchange'' or ``FIX'' is an
interface that allows Members and their Sponsored Customers to
connect, send, and receive messages related to orders and auction
orders to the Exchange. Features include the following: (1)
execution messages; (2) order messages; (3) risk protection triggers
and cancel notifications; and (4) post trade allocation messages.
See Supplementary Material .03(a) to Options 3, Section 7.
    \46\ ``Nasdaq Precise'' or ``Precise'' is a front-end interface
that allows Electronic Access Members and their Sponsored Customers
to send orders to the Exchange and perform other related functions.
Features include the following: (1) order and execution management:
enter, modify, and cancel orders on the Exchange, and manage
executions (e.g., parent/child orders, inactive orders, and post-
trade allocations); (2) market data: access to real-time market data
(e.g., NBBO and Exchange BBO); (3) risk management: set customizable
risk parameters (e.g., kill switch); and (4) book keeping and
reporting: comprehensive audit trail of orders and trades (e.g.,
order history and done away trade reports). See Supplementary
Material .03(d) to Options 3, Section 7.
    \47\ ``Ouch to Trade Options'' or ``OTTO'' is an interface that
allows Members and their Sponsored Customers to connect, send, and
receive messages related to orders, auction orders, and auction
responses to the Exchange. Features include the following: (1)
options symbol directory messages (e.g., underlying and complex
instruments); (2) system event messages (e.g., start of trading
hours messages and start of opening); (3) trading action messages
(e.g., halts and resumes); (4) execution messages; (5) order
messages; (6) risk protection triggers and cancel notifications; (7)
auction notifications; (8) auction responses; and (9) post trade
allocation messages. See Supplementary Material .03(b) to Options 3,
Section 7.
    \48\ See Options 7, Section 6, Ports and Other Services.
---------------------------------------------------------------------------

    Additionally, the Exchange proposes to amend Supplementary Material
.02(d) to Options 3, Section 7 related to Immediate-or-Cancel Orders.
The Exchange proposes to specifically amend Supplementary Material
.02(d)(3) to Options 3, Section 7 to add QCC with Stock Orders and
Complex QCC with Stock Orders to the list of order types that have a
Time in Force or ``TIF'' of Immediate-or-Cancel or ``IOC''. Because QCC
with Stock Orders and Complex QCC with Stock Orders have a TIF of IOC,
these order types will either execute on entry or cancel. Adding these
order types to Supplementary Material .02(d)(3) to Options 3, Section 7
will make this clear.
Options 3, Section 12
    The Exchange proposes to amend Options 3, Section 12(e)(4) to
clarify the manner in which a Member may submit a QCC with Stock
Order.\49\ Today, Options 3, Section 12(e)(4) provides that, ``QCC with
Stock Orders can be entered with separate prices for the stock and
options components, or with a net price for both.'' The Exchange
proposes to amend this rule text to instead reflect the current manner
in which QCC with Stock Orders may be entered into ISE's System. The
proposed rule text would provide, ``QCC with Stock Orders must be
entered with a net price for the stock and options components through
FIX. Separate prices for the stock and options components, or a net
price for both may be entered through Precise. The System will
calculate the individual component prices.'' The current language of
Options 3, Section 12(e)(4) is not correct because it does not specify
the protocols. The Exchange proposes to amend this language to make
clear the current System functionality. The proposed language does not
result in a change to the Exchange's System. As noted above, QCC with
Stock Orders may not be entered through OTTO. The Exchange notes that
requiring QCC with Stock Orders to be submitted through FIX or Precise
is consistent with proposed Options 3, Section 7(t) which requires
Members to enter QCC Orders through FIX or Precise. Additionally, the
Exchange is specifying how the System calculates the individual
component prices. Members may elect to enter orders through either FIX
or Precise. Members do not need to subscribe to both protocols.
---------------------------------------------------------------------------

    \49\ QCC with Stock Orders are processed in accordance with
Options 3, Section 12(e).
---------------------------------------------------------------------------

Options 3, Section 15
    The Exchange proposes to amend its Market Wide Risk Protection
within Options 3, Section 15(a)(1)(C) to add certain additional
information concerning the current Market Wide Risk Protection along
with new language that would apply as a result of the proposed changes
to stock-tied functionality.
    Today, the Exchange offers a Market Wide Risk Protection which is
comprised of an ``Order Entry Rate Protection'' which protects Members
against entering orders at a rate that exceeds predefined thresholds,
and an ``Order Execution Rate Protection,'' which protects Members
against executing orders at a rate that exceeds their predefined risk
settings. Both of these risk protections are detailed in the ``Market
Wide Risk Protection.'' Today, pursuant to the proposed Market Wide
Risk Protection rule, the Exchange's System maintains one or more
counting programs for each Member that count orders entered and
contracts traded on ISE. Members can use multiple counting programs to
separate risk protections for different groups established within the
Member.
    ISE Options 3, Section 15(a)(1)(C) currently states, that the
counting programs will maintain separate counts, over rolling time
periods specified by the Member for each count of:

    (1) the total number of orders entered in the regular order
book; (2) the total number of orders entered in the complex order
book with only options legs; (3) the total number of orders entered
in the complex order book with both stock and options legs; (4) the
total number of contracts traded in regular orders; and (5) the
total number of contracts traded in complex orders with only options
legs.

    Today, the counting programs maintain separate counts over rolling
time period for the total number of orders entered in the regular order
book, complex order book with only options legs; and the complex order
book with both stock and options legs. Additionally, the risk
protection counts the total number of contracts traded in regular
orders and Complex Orders with only options legs.\50\ The Exchange
proposes to amend ISE Options 3, Section 15(a)(1)(C) within (2) through
(5) to use the defined terms Stock-Option Order, Stock-Complex Order,
and Complex Option Order. The Exchange notes that the stock portion of
QCC Orders, Complex Qualified QCC Orders, QCC with Stock Orders, and
Complex QCC with Stock Orders are not counted in (3) because ISE's
System does not handle the stock portion of these orders. ISE would not
represent the stock leg through NES as it would for other Stock-Option
Orders and Stock-Complex Orders as described herein. The Exchange notes
that QCC Orders, Complex Qualified QCC Orders, QCC with Stock Orders,
and Complex QCC with Stock Orders are considered, where applicable, in
Options 3, Section 15(a)(1)(C)(1), (2), (4) and (5).
---------------------------------------------------------------------------

    \50\ The Member's allowable order rate for the Order Entry Rate
Protection is comprised of the parameters defined in (1) to (3),
while the allowable contract execution rate for the Order Execution
Rate Protection is comprised of the parameters defined in (4) and
(5).
---------------------------------------------------------------------------

    Today, the Exchange does not include a complex execution count for
Complex Orders with a stock component as the execution counts
maintained by the Order Execution Rate Protection are based solely on
options contracts traded. At this time, as a result of

amending the stock-tied functionality, the Exchange proposes to add a
new number (6) to ISE Options 3, Section 15(a)(1)(C) to note that the
counting programs will maintain separate counts, over rolling time
periods specified by the Member for each count, of the total number of
Stock-Option Order and Stock-Complex Order contracts traded. The
Exchange is adding new number (6) because it is introducing NES in
place of a third-party broker-dealer. As a result, the Exchange will
guarantee a stock-tied execution. Today, the stock-tied execution is
not guaranteed by the third-party broker-dealer. Because of the ability
to guarantee the execution, the Exchange is amending Options 3, Section
15(a)(1)(C) to add (6) to the list of contracts counted by the Market
Wide Risk Protection because the Exchange is able to perform the risk
check since NES will be handling the stock for Stock-Option Orders and
Stock-Complex Orders. This risk protection will reduce risk associated
with system errors or market events that may cause Members to send a
large number of orders, or receive multiple, automatic executions,
before they can adjust their exposure in the market. Without adequate
risk management tools, such as those proposed in this filing, Members
could reduce the amount of order flow and liquidity that they provide
on ISE. As a result, the functionality promotes just and equitable
principles of trade.
    Finally, the Exchange proposes to add the defined term ``DNTT'' to
the end of Options 3, Section 16(a) to define the instruction on a
Complex Order to price each leg of the Complex Order to be executed
equal to or better than the NBBO for the options series or any stock
component, as applicable as a ``Do-Not-Trade-Through'' or ``DNTT''.
This is not a substantive amendment, rather this change is meant to
assist Members in locating this functionality within ISE's rules.
Implementation
    The Exchange intends to begin implementation of the proposed rule
change prior to December 20, 2024. The implementation would commence
with a limited symbol migration and continue to migrate symbols over
several weeks. The Exchange will issue an Options Trader Alert to
Members to provide notification of the symbols that will migrate and
the relevant dates.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\51\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\52\ in particular, in that it is designed to
promote just and equitable principles of trade and to protect investors
and the public interest for the reasons discussed below.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78f(b).
    \52\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Stock-Related Strategies and Elimination of Trade Value Allowance
Stock-Tied Functionality
    The Exchange's proposal to amend its stock-tied functionality as
described above promotes just and equitable principles of trade and
removes impediments to and perfect the mechanism of a free and open
market and a national market system because it will permit the Exchange
to streamline its stock-tied processes as discussed more fully below.
Further, the amendments to require that a Member desiring to execute an
order with stock or an ETF component enter into a brokerage agreement
with NES, a broker-dealer owned and operated by Nasdaq, Inc., protects
investors and the general public because Members will be required to
comply with NES' requirements and those requirements will be uniform
for all ISE Members. The proposed stock-tied functionality is identical
to Phlx Options 3, Sections 13(b)(10)(ii) and 14(a)(i) with respect to
utilizing NES to process and report stock-tied functionality with two
differences.
    First, while both Phlx and ISE have certain risk protections for
complex orders, they differ. With respect to ISE, the execution price
of the Complex Order must be within a certain price from the current
market, as determined by the Exchange pursuant to Options 3, Section
16(a). Specifically, today, ISE Options 3, Section 16(a) provides that
the System will not permit any leg of a complex strategy to trade-
through the NBBO for the series or any stock component by a
configurable amount calculated as the lesser of (i) an absolute amount
not to exceed $0.10, and (ii) a percentage of the NBBO not to exceed
500%, as determined by the Exchange on a class, series or underlying
basis. Phlx Options 3, Section 16(b)(i) describes Phlx's ACE Parameter
which defines a price range outside of which a complex order will not
be executed. On Phlx, a complex order to sell is not executed at a
price that is lower than the cNBBO bid by more than the ACE Parameter.
Conversely, on Phlx, a complex order to buy will not be executed at a
price that is higher than the cNBBO offer by more than the ACE
Parameter. While ISE's and Phlx's price checks differ, both markets
seek to prevent executions from occurring at certain prices and at
certain percentages from the NBBO. The Exchange believes that this
proposal promotes just and equitable principles of trade because NES
would apply the same price check for stock-tied functionality that was
being applied previously by a third party that executed the stock or
ETF component of a complex strategy on behalf of ISE Members.
Additionally, ISE Members would continue to be subject to the same
price check which is applied to all Complex Orders executed on ISE.
    Second, ISE and Phlx differ with respect to the manner in which
their systems handle Stock-Option Strategies and Stock-Complex
Strategies that would execute against interest on the Complex Order
Book at a price that do not meet price checks as provided for in
proposed Options 3, Section 16(d) \53\ or do not meet Regulation SHO
provisions as provided for in proposed Options 3, Section 16(e) \54\
are handled by their respective systems. As proposed, ISE will hold
orders on the Complex Order book that cannot be executed because of
Regulation SHO or price check restrictions, unless the Member requests
the order to be cancelled. If an ISE Member elects to have the order
held on the Complex Order Book, the order would await other matching
opportunities, otherwise at the Member's election the order would be
returned to the Member. In contrast, Phlx only provides for a
cancellation of the order. The Exchange believes that this proposal
promotes just and equitable principles of trade because ISE's proposed
approach would provide the Member with optionality as to the handing of
the order. The Exchange believes providing the choice to have the order
held on the Complex Order Book provides Members with an opportunity for
an execution.
---------------------------------------------------------------------------

    \53\ As proposed, the execution price of Stock-Option Strategies
and Stock-Complex Strategies must be within the high-low range for
the day in that stock at the time the Complex Order is processed and
within a certain price from the current market pursuant to Options
3, Section 16(a), as determined by the Exchange.
    \54\ See supra note 19.
---------------------------------------------------------------------------

    NES, an affiliate of the Exchange and a registered broker-dealer,
has been approved by the Commission to become a Member of the Exchange
and perform inbound routing on behalf of the Exchange.\55\
Additionally, NES is permitted to route outbound orders either directly
or indirectly through a third party routing broker-dealer to other
market centers and perform other

functions regarding the cancellation of orders and the maintenance of a
NES error account.\56\ The functions performed by NES on Phlx today are
identical to the functions that ISE proposes for NES to perform for ISE
Members.\57\ Identical to Phlx, after ISE's System determines that a
Complex Order is possible and identifies the prices for each component
of such Complex Order, ISE will electronically communicate the stock or
ETF component of the Complex Order to NES for execution.\58\
---------------------------------------------------------------------------

    \55\ See supra note 13.
    \56\ See supra note 14.
    \57\ See Securities Exchange Act Release No. 63777 (January 26,
2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-2010-157) (Order
Approving a Proposed Rule Change, as Modified by Amendment Nos. 1
and 2, Relating to Complex Orders) (``Phlx Complex Order
Approval''). NES assumed the stock execution functionalities that
were previously performed by NOS. Phlx subsequently filed to permit
both inbound and outbound orders to be routed through NES instead of
Nasdaq Options Services LLC (``NOS''). See Securities Exchange Act
Release No. 71417 (January 28, 2014), 79 FR 6253 (February 3, 2014)
(SR-Phlx-2014-04) (Notice of Filing and Immediate Effectiveness of
Proposed Rule Change to Outbound Routing) and 71416 (January 28,
2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to
Inbound Routing of Options Orders).
    \58\ See proposed Supplementary Material .08(b) to Options 3,
Section 11, proposed Options 3, Section 12(b)(2), proposed
Supplementary Material .09(b) to Options 3, Section 13, proposed
Supplementary Material .02 to Options 3, Section 14 and proposed
Options 3, Section 16(d). See also Phlx Options 3, Section
13(b)(10)(ii), Options 3, Section 16(b).
---------------------------------------------------------------------------

    NES, acting as agent for the orders to buy and sell the underlying
stock or ETF, will execute the orders in the OTC market and will handle
the orders pursuant to applicable rules regarding equity trading,
including the rules governing trade reporting, trade-throughs, and
short sales. Today, this function is performed by a third-party broker-
dealer that executes the stock or ETF component of a complex strategy
on behalf of ISE Members. As proposed, this structure will promote just
and equitable principles of trade because NES will be responsible for
the proper execution, trade reporting, and submission to clearing of
the underlying stock or ETF component of a Complex Order.\59\
Furthermore, today, NES is responsible for compliance with FINRA rules
generally and is subject to examination by FINRA.\60\ Finally, today,
NES has in place policies related to confidentiality and the potential
for informational advantages relating to its affiliates, intended to
protect against the misuse of material nonpublic information.\61\ In
particular, NES will have in place policies and procedures designed to
prevent the misuse of material non-public information related to stock-
tied executions which will protect investors and the public interest.
NES only receives information about the stock or ETF portion of the
order from the Exchange. As mentioned herein, today, NES is responsible
for the proper execution, trade reporting, and submission to clearing
of the underlying stock or ETF component of a Complex Order on Phlx.
ISE will adopt identical policies and procedures for its stock-tied
functionality as are in place on Phlx today.
---------------------------------------------------------------------------

    \59\ See supra note 20.
    \60\ NES is subject to FINRA Rule 3110, which generally requires
that the policies and procedures and supervisory systems be
reasonably designed to achieve compliance with applicable securities
laws and regulations and with applicable FINRA rules, including
those relating to the misuse of material non-public information.
    \61\ See supra note 21.
---------------------------------------------------------------------------

    In addition, the execution and reporting of the stock/ETF piece
will occur otherwise than on ISE or any other exchange, and will be
handled by NES pursuant to applicable rules regarding equity
trading,\62\ including the rules governing trade reporting, trade-
throughs and short sales. The Exchange's proposal also promotes just
and equitable principles of trade as NES will report the trades to the
Trade Reporting Facility.\63\ Further, all ISE Members may execute
stock-tied transactions. All stock-tied transactions will have the
stock/ETF component of a Complex Order, once executed, properly
processed for trade reporting purposes. Phlx has identical rules for
processing and reporting.\64\
---------------------------------------------------------------------------

    \62\ See supra note 23.
    \63\ See supra note 24.
    \64\ See Phlx Options 3, Sections 13(b)(10) and 14(a)(i).
---------------------------------------------------------------------------

    With respect to trade-throughs, the Exchange believes that the
stock/ETF component of a Complex Order is eligible for the Qualified
Contingent Trade Exemption from Rule 611(a) of Regulation NMS. The
Exchange believes that the stock/ETF portion of a Complex Order under
this proposal complies with all six requirements of the Qualified
Contingent Trade Exemption.\65\ In order to promote just and equitable
principles of trade, ISE's System will validate compliance with each
requirement such that any matched order received by NES under this
proposal has been checked for compliance with the exemption. Members
may only submit Complex Orders with a stock/ETF component if such
orders comply with the Qualified Contingent Trade Exemption.\66\
Members submitting such Complex Orders with a stock/ETF component
represent that such orders comply with the Qualified Contingent Trade
Exemption. Thus, the Exchange believes that Complex Orders consisting
of a stock/ETF component will comply with the exemption and that ISE's
System will validate such compliance to assist NES in carrying out its
responsibilities as agent for these orders.
---------------------------------------------------------------------------

    \65\ The six requirements include: (1) At least one component
order is in an NMS stock: The stock/ETF component must be an NMS
stock, which is validated by the System; (2) all components are
effected with a product or price contingency that either has been
agreed to by the respective counterparties or arranged for by a
broker-dealer as principal or agent: A Complex Order, by definition
consists of a single net/debit price and this price contingency
applies to all the components of the order, such that the stock
price computed and sent to NES allows the stock/ETF order to be
executed at the proper net debit/credit price based on the execution
price of each of the option legs, which is determined by the ISE
System; (3) the execution of one component is contingent upon the
execution of all other components at or near the same time: Once a
Complex Order is accepted and validated by the System, the entire
package is processed as a single transaction and each of the option
leg and stock/ETF components are simultaneously processed; (4) the
specific relationship between the component orders (e.g., the spread
between the prices of the component orders) is determined at the
time the contingent order is placed: Complex Orders, upon entry,
must have a size for each component and a net debit/credit, which
the System validates and processes to determine the ratio between
the components; an order is rejected if the net debit/credit price
and size are not provided on the order; (5) the component orders
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 since cancelled: under this proposal, the stock/ETF
component must be the underlying security respecting the option
legs, which is validated by the System; and (6) the transaction is
fully hedged (without regard to any prior existing position) as a
result of the other components of the contingent trade: Under this
proposal, the ratio between the options and stock/ETF must be a
conforming ratio (8 contracts per 100 shares), which the System
validates, and which under reasonable risk valuation methodologies,
means that the stock/ETF position is fully hedged.
    \66\ See Supplementary Material .07 to Options 3, Section 14.
---------------------------------------------------------------------------

    With respect to short sale regulation, the proposed handling of the
stock/ETF component of a Complex Order under this proposal should not
raise any issues of compliance with the currently operative provisions
of Regulation SHO \67\ and therefore promote just and equitable
principles of trade. When a Complex Order has a stock/ETF component,
Members must indicate, pursuant to Regulation SHO, whether that order
involves a long or short sale. The System will accept Complex Orders
with a stock/ETF component marked to reflect either a long or short
position; specifically, orders not marked as buy, sell or sell short
will be rejected by ISE's System.\68\ The System will electronically
deliver the stock/ETF

component to NES for execution. Simultaneous to the options execution
on ISE's System, NES will execute and report the stock/ETF component,
which will contain the long or short indication as it was delivered by
the Member to ISE's System. Accordingly, NES, as a trading center under
Rule 201, will be compliant with the requirements of Regulation SHO. Of
course, broker-dealers, including both NES and the Members submitting
orders to ISE with a stock/ETF component, must comply with Regulation
SHO. NES' compliance team updates, reviews and monitors NES' policies
and procedures including those pertaining to Regulation SHO on an
annual basis.
---------------------------------------------------------------------------

    \67\ 17 CFR 242.200 et seq.
    \68\ The Exchange also accept short sell exempt orders as
described herein.
---------------------------------------------------------------------------

    Further, proposed Options 3, Section 16(e) provides that when the
short sale price test in Rule 201 of Regulation SHO \69\ is triggered
for a covered security, NES will not execute a short sale order in the
underlying covered security component of a Complex Order if the price
is equal to or below the current national best bid. However, NES will
execute a short sale order in the underlying covered security component
of a Complex Order if such order is marked ``short exempt,'' regardless
of whether it is at a price that is equal to or below the current
national best bid. If NES cannot execute the underlying covered
security component of a Complex Order in accordance with Rule 201 of
Regulation SHO, the Exchange will hold the Complex Order on the Complex
Order Book, if consistent with Member instructions (Members may always
elect to cancel the order).\70\ The order may execute at a price that
is not equal to or below the current national best bid. This proposed
rule is similar to Phlx Options 3, Section 16(b) except that unlike
Phlx, ISE will not cancel back the Complex Order to the entering Member
unless the Member requests that the order be cancelled back. The
proposal is identical to MRX Options 3, Section 16(b).
---------------------------------------------------------------------------

    \69\ See supra note 30.
    \70\ See proposed Options 3, Section 16(e). In contrast, Complex
Orders in an auction mechanism that cannot be executed in accordance
with Regulation SHO will be cancelled back and will not rest on the
Complex Order Book as provided in Supplementary Material .08 to
Options 3, Section 11 and Supplementary Material .09 to Options 3,
Section 13.
---------------------------------------------------------------------------

    For these reasons, the processing of the stock/ETF component of a
Complex Order under this proposal will comply with applicable rules
regarding equity trading, including the rules governing trade
reporting, trade-throughs and short sales and is consistent with the
Act. NES's responsibilities respecting these equity trading rules will
be documented in NES's written policies and procedures. NES' compliance
team updates, reviews and monitors NES' policies and procedures. NES is
regulated by FINRA and as such, NES policies and procedures are subject
to review and examinations by FINRA.
    Further, as part of the execution of the stock/ETF component, the
Exchange will ensure that the execution price is within the intra-day
high-low range for the day in that stock at the time the Complex Order
is processed and within a certain price range from the current market
pursuant to Options 3, Section 16(a) which will protect investors and
the general public.\71\ If the stock price is not within these
parameters, the Complex Order is not executable and would be held on
the order book or cancelled, consistent with Member instructions.\72\
Today, the third-party broker-dealer ensures the execution price is
within the intra-day high-low range. With the transition to NES, the
Exchange would commence performing this check. Members who transact
stock-tied functionality on ISE would therefore continue to be subject
to the same execution price check with NES as today. This intra-day
high-low range check does not occur for certain Complex Orders auctions
(e.g. Complex PIM Orders,\73\ Complex Facilitation Orders \74\ and
Complex SOM Orders \75\) and also does not occur for Complex Customer
Cross Orders \76\ or Complex QCC Orders.\77\ The Exchange believes that
this exception for auctions is consistent with the Act because these
auctions have their own rules for auction eligibility, entry checks,
and offer price improvement all of which are distinguishable from
execution of orders on the Complex Order Book. Complex Customer Cross
Orders 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 strategy on the Complex Order Book; (ii) there are no Priority
Customer Complex Orders for the same strategy at the same price on the
Complex Order Book; and (iii) the options legs can be executed at
prices that comply with the provisions of Options 3, Section 14(c)(2).
Complex Customer Cross Orders will be rejected if they cannot be
executed.\78\
---------------------------------------------------------------------------

    \71\ See supra note 35.
    \72\ Similar to other order types, the Member may elect to enter
the order as an Immediate-or-Cancel to avoid resting on the order
book or as Day order which could rest on the order book.
    \73\ A Complex PIM Order is an order entered into the Complex
Price Improvement Mechanism as described in Options 3, Section
13(e). See ISE Options 3, Section 14(b)(18).
    \74\ A Complex Facilitation Order is an order entered into the
Complex Facilitation Mechanism as described in Options 3, Section
11(c). See ISE Options 3, Section 14(b)(16).
    \75\ A Complex SOM Order is an order entered into the Complex
Solicited Order Mechanism as described in Options 3, Section 11(e).
See ISE Options 3, Section 14(b)(17).
    \76\ See Options 3, Section 12(b).
    \77\ See Options 3, Section 12(d).
    \78\ Supplementary Material .01 to Options 3, Section 22 applies
to Complex Customer Cross Orders.
---------------------------------------------------------------------------

    Finally, the Exchange also believes that it is appropriate to
construct a program wherein its affiliate, NES, is the exclusive
conduit for the execution of the stock/ETF component of a Complex Order
under this proposal, identical to Phlx and MRX.\79\ As a practical
matter, complex order programs on other exchanges involve specific
arrangements with a broker-dealer to facilitate prompt execution. NES
does not intend to charge a fee for the execution of the stock/ETF
component of a Complex Order.\80\ The Exchange believes that is
consistent with the Act for such an arrangement to involve one broker-
dealer, even one that is an affiliate, particularly to offer the
aforementioned benefits of a prompt, electronic execution for Complex
Orders involving stock/ETFs. Specifically, offering a seamless,
automatic execution for both the options and stock/ETF components of a
Complex Order is an important feature that should promote just and
equitable principles of trade and remove impediments to and perfect the
mechanism of a free and open market and a national market system by
deeply enhancing the sort of complex order processing available on
options exchanges today. Nevertheless, Members could, in lieu of this
proposed arrangement with NES, choose, instead, the following
alternatives: (i) avoid using Complex Orders that involve stock/ETFs,
(ii) use a trading floor to execute Complex Order with stock, or (iii)
go to another options venue, several of which offer a similar
feature.\81\
---------------------------------------------------------------------------

    \79\ See supra note 39. See proposed Supplementary Material .02
to ISE Options 3, Section 14. In addition to amending Supplementary
Material .02 to ISE Options 3, Section 14 to require Members to
enter into a brokerage agreement, the Exchange proposes to make
conforming changes to Supplementary Material .02 to ISE Options 3,
Section 14 to delete provisions that allow Members to enter into a
brokerage agreement with one or more brokers to route stock orders.
See MRX Supplementary Material .02 to ISE Options 3, Section 14.
    \80\ See supra note 40.
    \81\ See supra note 41.
---------------------------------------------------------------------------

    The Exchange's proposal to remove the second and third sentences
within Supplementary Material .02 of Options 3, Section 14 \82\ is
consistent with the

Act in that it protects investors and the general public because this
new workflow in which the stock or ETF component of the order will be
routed to NES for execution instead of a third-party broker-dealer will
obviate the possibility that the stock execution venue will be
unavailable for trading while the order is being processed because of
the efficiency created in executing the entire transaction, including
stock component validation and reporting, without the need for ISE to
utilize a third-party broker-dealer and await a response from the
third-party broker-dealer. ISE would no longer be reliant on a third-
party broker-dealer to conduct the appropriate checks and, thereafter,
relay information to ISE. With the proposed change, NES, the Exchange's
affiliate, would conduct the necessary checks and thereafter the Stock-
Option Order or Stock-Complex Order would be available for execution.
Proposed Options 3, Sections 16(d) and (e) describe the System price
checks that will be performed for Stock-Option Orders or Stock-Complex
Orders by NES.
---------------------------------------------------------------------------

    \82\ The second and third sentences of Supplementary Material
.02 of ISE Options 3, Section 14 states, ``A trade of a Stock-Option
Order or a Stock-Complex Order will be automatically cancelled if
market conditions prevent the execution of the stock or option
leg(s) at the prices necessary to achieve the agreed upon net price.
When a Stock-Option Order or Stock-Complex Order has been matched
with another Stock-Option Order or Stock-Complex Order that is for
less than the full size of the Stock-Option Order or Stock-Complex
Order, the full size of the Stock-Option Order or Stock Complex
Order being processed by the stock execution venue will be
unavailable for trading while the order is being processed.''
---------------------------------------------------------------------------

    Similarly, the Exchange's proposal to amend Supplementary Material
.04 to Options 3, Section 14 to provide that Stock-Option Strategies
and Stock-Complex Strategies will open pursuant to the Complex Opening
Price Determination described in Supplementary Material .05 to Options
3, Section 14, instead of the Complex Uncrossing Process described in
Supplementary Material .06(b) to Options 3, Section 14, is consistent
with the Act. Similar to the discussion above, today the applicable
checks for the stock/ETF component of a Stock-Option Strategy and
Stock-Complex Strategy are being performed by a third-party broker-
dealer, which causes a delay that prevents these strategies from
participating in the Complex Opening Process. With the proposed change
to utilize NES, in lieu of a third-party broker-dealer, Stock-Option
Strategies and Stock-Complex Strategies would be able to participate in
the Complex Opening Process as NES, the Exchange's affiliate, would
conduct the necessary price checks and would be able to make Stock-
Option Order or Stock-Complex Order available to participate in the
Complex Opening Process without the need for ISE to await a response
from a third-party broker-dealer. This amendment is consistent with the
Act as it serves to protect investors and the general public by
improving the Exchange's processes to make Stock-Option Strategies and
Stock-Complex Strategies subject to the Complex Opening Price
Determination similar to other order types. The Complex Opening Process
seeks to maximize the interest which is traded during the Complex
Opening Price Determination process and deliver a rational price for
the available interest at the opening. The Complex Opening Price
Determination process maximizes the number of contracts executed during
the Complex Opening Process and ensures that residual contracts of
partially executed orders or quotes are at a price equal to or inferior
to the Opening Price.
Trade Value Allowance
    The Exchange's proposal to no longer offer Trade Value Allowance is
consistent with the Act because very few Members have opted to utilize
the Trade Value Allowance and even a smaller percentage of trades were
subject to the allowance. MRX recently removed its Trade Value
Allowance as described in SR-MRX-2023-10. Phlx does not have a similar
allowance today. In an effort to harmonize its complex order
functionality across its Nasdaq affiliated markets, the Exchange
proposes to no longer offer the Trade Value Allowance functionality. In
addition, the Exchange believes that this proposal removes impediments
to and perfect the mechanism of a free and open market and a national
market system because the proposal removes an allowance that is no
longer necessary; other options exchanges, like Phlx, do not offer such
an allowance. With the proposed change to utilize NES, the Exchange
would be able to determine stock leg prices, and NES would be able to
execute the stock leg at two different prices to ensure that the net
price of the execution is within the notional value of the original
order, thus eliminating the need for the allowance.
Options 3, Section 7
    The Exchange's proposal to make a clarifying change to ISE Options
3, Section 7, Types of Orders and Order and Quote Protocols is
consistent with the Act. The Exchange proposes to amend ISE Options 3,
Section 7(t) related to QCC with Stock Orders to make clear that QCC
with Stock Orders may only be entered through FIX or Precise. ISE has 3
order entry protocols, FIX, OTTO and Precise. QCC with Stock Orders may
not be entered through OTTO. Members only require one order entry
protocol to enter orders onto ISE. While Members only require one order
entry port to submit orders into ISE, the Exchange offers Member a
choice between 2 different types of ports to utilize to submit QCC with
Stock Orders.\83\ All Members would have the ability to enter QCC with
Stock Orders through FIX or Precise. Members are not required to
subscribe to both FIX and Precise. The Exchange's proposal to add rule
text to Options 3, Section 7(t) will clarify the functionality, thereby
protecting investors and the general public.
---------------------------------------------------------------------------

    \83\ See Options 7, Section 6, Ports and Other Services.
---------------------------------------------------------------------------

    Additionally, the Exchange's proposal to amend Supplementary
Material .02(d) to Options 3, Section 7 related to Immediate-or-Cancel
Orders is consistent with the Act. The Exchange proposes to
specifically amend Supplementary Material .02(d)(3) to Options 3,
Section 7 to add QCC with Stock Orders and Complex QCC with Stock to
the list of order types that have a Time in Force or ``TIF'' of
Immediate-or-Cancel or ``IOC''. Because QCC with Stock Orders and
Complex QCC with Stock have a TIF of IOC, these order types will
execute either execute on entry or cancel. This amendment will make
clear the manner in which the aforementioned order types trade, thereby
protecting investors and the general public.
Options 3, Section 12
    The Exchange's proposal to amend Options 3, Section 12(e)(4) to
clarify that a Member may submit a QCC with Stock Order with a net
price for the stock and options components through FIX or Members may
submit separate prices for the stock and options components, or a net
price for both may be entered through Precise. This amendment is
consistent with the Act because the amended rule text makes clear the
format in which these orders may be submitted to the System depending
on the protocol. Today, the Exchange does not allow FIX to accept QCC
with Stock Orders with separate prices for the stock and options
components but does permit Members to do so through Precise. Each
exchange may specify the manner in which certain order types may be
submitted to an exchange and the format for submitting those orders.
The proposal protects investors and the general public by clarifying
the manner in which

Members may submit QCC with Stock Orders. The proposed language does
not result in a change to the Exchange's System. As noted above, QCC
with Stock Orders may not be entered through OTTO. The Exchange notes
that requiring QCC with Stock Orders to be submitted through FIX or
Precise is consistent with proposed Options 3, Section 7(t) which
requires Members to enter QCC Orders through FIX or Precise.
Options 3, Section 15
    The Exchange's proposal to amend its Market Wide Risk Protection
within Options 3, Section 15(a)(1)(C) to add certain additional
information concerning the current Market Wide Risk Protection along
with new language that would apply as a result of the proposed changes
to stock-tied functionality is consistent with the Act. The proposed
changes to ISE Options 3, Section 15(a)(1)(C) protect investors and the
public interest by clearly describing the operation of the Market Wide
Risk Protection by using defined terms. Proposed ISE Options 3, Section
15(a)(1)(C)(6) adds the total number of contracts traded in Stock-
Option Orders and Stock-Complex Orders to the Market Wide Risk
Protection. This change protects investors and the general public
because this risk protection by expanding the scope of the Market Wide
Risk Protection to include additional contracts which will reduce risk
associated with system errors or market events that may cause Members
to send a large number of orders, or receive multiple, automatic
executions, before they can adjust their exposure in the market. The
Exchange notes that QCC Orders, Complex Qualified QCC Orders, QCC with
Stock Orders, and Complex QCC with Stock Orders are considered, where
applicable, in Options 3, Section 15(a)(1)(C)(1), (2), (4) and (5).
Members will continue to be provided with the flexibility needed to
appropriately tailor the Market Wide Risk Protection to their
respective risk management needs.

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

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Re-Introduction of Stock-Related Strategies and Elimination of Trade
Value Allowance
Stock-Tied Functionality
    The Exchange's proposal to amend its stock-tied functionality does
not impose an intra-market undue burden on competition as all Members
may utilize the stock-tied functionality and would be uniformly subject
to the requirements associated with executing a stock-tied transaction.
Also, in lieu of this proposed arrangement with NES, Members could
choose, instead, the following alternatives: (i) avoid using Complex
Orders that involve stock/ETFs, (ii) use a trading floor to execute
Complex Order with stock, or (iii) go to another options venue, several
of which offer a similar feature.\84\ The Exchange's proposal to amend
its stock-tied functionality does not impose an inter-market undue
burden on competition as other options exchanges today may offer a
similar process for handling stock-tied transactions. Today, Phlx and
MRX offer an identical process for handling stock-tied
transactions.\85\
---------------------------------------------------------------------------

    \84\ See supra note 41.
    \85\ See Phlx Options 3, Sections 13(b)(10) and 14(a)(i). See
also MRX Supplementary Material .08(b) to Options 3, Section 11
Options 3, Section 12(b)(2), Supplementary Material .09(b) to
Options 3, Section 13, Supplementary Material .02 to Options 3,
Section 14 and Options 3, Section 16(d).
---------------------------------------------------------------------------

    The Exchange's proposal to remove rule text from Options 3, Section
14 that states, ``When a Stock-Option Order or Stock-Complex Order has
been matched with another Stock-Option Order or Stock-Complex Order
that is for less than the full size of the Stock-Option Order or Stock-
Complex Order, the full size of the Stock-Option Order or Stock Complex
Order being processed by the stock execution venue will be unavailable
for trading while the order is being processed,'' does not impose an
undue burden on intra-market competition because the proposed new
functionality will apply equally to all Members transacting Complex
Orders on ISE. All Stock-Option Orders and Stock-Complex Orders will be
handled in the same manner by the System. The Exchange's proposal to
remove rule text from Options 3, Section 14 does not impose an undue
burden on inter-market competition as the scope of this change is
limited to ISE and its relationship with a broker-dealer handling the
stock component of the order.
    The Exchange's proposal to remove the rule text within
Supplementary Material .02 of Options 3, Section 14 \86\ does not
impose an undue burden on intra-market competition because all Members
will have the ability to use the new workflow in which the stock or ETF
component of the order will be routed to NES for execution instead of a
third-party broker-dealer. The proposed new functionality will apply
equally to all Members transacting Complex Orders on ISE. All Stock-
Option Orders and Stock-Complex Orders will be handled in the same
manner by the System. Additionally, this proposed amendment will not
impose an undue burden on inter-market competition because all market
participants that direct orders to ISE will have their orders handled
in a similar manner. The proposed stock-tied functionality is identical
to Phlx Options 3, Sections 13(b)(10)(ii) and 14(a)(i) with respect to
utilizing NES to process and report the stock or ETF component of a
Complex Order. MRX Supplementary Material .08(b) to Options 3, Section
11 Options 3, Section 12(b)(2), Supplementary Material .09(b) to
Options 3, Section 13, Supplementary Material .02 to Options 3, Section
14 and Options 3, Section 16(d) also permit MRX to utilize NES to
process and report the stock or ETF component of a Complex Order.
---------------------------------------------------------------------------

    \86\ Supplementary Material .02 of Options 3, Section 14 states
that, ``Members may also indicate preferred execution brokers, and
such preferences will determine order routing priority whenever
possible. A trade of a Stock-Option Order or a Stock-Complex Order
will be automatically cancelled if market conditions prevent the
execution of the stock or option leg(s) at the prices necessary to
achieve the agreed upon net price. When a Stock-Option Order or
Stock-Complex Order has been matched with another Stock-Option Order
or Stock-Complex Order that is for less than the full size of the
Stock-Option Order or Stock-Complex Order, the full size of the
Stock-Option Order or Stock Complex Order being processed by the
stock execution venue will be unavailable for trading while the
order is being processed.''
---------------------------------------------------------------------------

    Similarly, the Exchange's proposal to amend Supplementary Material
.04 to Options 3, Section 14 to provide that Stock-Option Strategies
and Stock-Complex Strategies will open pursuant to the Complex Opening
Price Determination described in Supplementary Material .05 to Options
3, Section 14, instead of the Complex Uncrossing Process described in
Supplementary Material .06(b) to Options 3, Section 14, does not impose
an undue burden on intra-market competition because all Stock-Option
Strategies and Stock-Complex Strategies will be subject to the same
process. All Stock-Option Orders and Stock-Complex Orders will be
transacted in the Complex Opening by the System. The Exchange's
proposal to amend Supplementary Material .04 to Options 3, Section 14
to provide that Stock-Option Strategies and Stock-Complex Strategies
will open pursuant to the Complex Opening Price Determination described
in Supplementary Material .05 to Options 3, Section 14, instead of the
Complex Uncrossing Process described in Supplementary Material .06(b)
to Options 3, Section 14 does not

impose an undue burden on inter-market competition because other
options markets may also elect to permit similar order types to trade
in their complex opening process.
Trade Value Allowance
    The Exchange's proposal to no longer offer Trade Value Allowance
does not impose an undue burden on intra-market competition because no
Member would be able to utilize the Trade Value Allowance. The proposed
stock-tied functionality is identical to Phlx Options 3, Sections
13(b)(10)(ii) and 14(a)(i) and MRX Supplementary Material .08(b) to
Options 3, Section 11 Options 3, Section 12(b)(2), Supplementary
Material .09(b) to Options 3, Section 13, Supplementary Material .02 to
Options 3, Section 14 and Options 3, Section 16(d). with respect to
utilizing NES to process and report the stock or ETF component of a
Complex Order.
    The Exchange's proposal to no longer offer Trade Value Allowance
does not impose an undue burden on inter-market competition because
other options exchanges could choose to offer a similar functionality.
Options 3, Section 7
    The Exchange's proposal to make a clarifying change to ISE Options
3, Section 7, Types of Orders and Order and Quote Protocols does not
impose an undue burden on intra-market competition because all Members
may enter QCC with Stock Orders through FIX or Precise. While Members
only require one order entry port to submit orders into ISE, the
Exchange offers Members a choice between 2 different types of ports to
utilize to submit QCC with Stock Orders.\87\
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    \87\ See Options 7, Section 6, Ports and Other Services.
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    The Exchange's proposal to make a clarifying change to ISE Options
3, Section 7, Types of Orders and Order and Quote Protocols does not
impose an undue burden on inter-market competition because other
options exchanges may also create order entry protocols for their
markets.
    Additionally, the Exchange's proposal to amend Supplementary
Material .02(d) to Options 3, Section 7 to add QCC with Stock Orders
and Complex QCC with Stock to the list of order types that have a Time
in Force or ``TIF'' of Immediate-or-Cancel or ``IOC'' does not impose
an undue burden on intra-market competition because this amendment
reflects the description of these particular order types which will
either execute on entry or cancel. All QCC with Stock Orders and
Complex QCC with Stock that are entered on ISE will be handled in the
same manner. Further, all Members may trade QCC with Stock Orders and
Complex QCC with Stock Orders. Additionally, the Exchange's proposal to
amend Supplementary Material .02(d) to Options 3, Section 7 related to
Immediate-or-Cancel Orders does not impose an undue burden on inter-
market competition because other options markets may adopt a similar
requirement for such orders.
Options 3, Section 12
    The Exchange's proposal to amend Options 3, Section 12(e)(4) to
clarify that a Member may submit a QCC with Stock Order with a net
price for the stock and options components through FIX or they may
submit separate prices for the stock and options components, or a net
price for both may be entered through Precise does not impose an intra-
market burden on competition because all Members are required to
uniformly submit QCC with Stock Orders in this fashion.
    The Exchange's proposal to amend Options 3, Section 12(e)(4) to
clarify that a Member may submit a QCC with Stock Order with a net
price for the stock and options components through FIX or they may
submit separate prices for the stock and options components, or a net
price for both may be entered through Precise does not impose an inter-
market burden on competition because each exchange may specify the
manner in which certain order types may be submitted to an exchange and
the format for submitting those orders. Also, requiring QCC with Stock
Orders to be submitted through FIX or Precise is consistent with
proposed Options 3, Section 7(t) which requires Members to enter QCC
Orders through FIX or Precise.
Options 3, Section 15
    The Exchange's proposal to amend its Market Wide Risk Protection
within Options 3, Section 15(a)(1)(C) to utilize defined terms along
with new language does not impose an undue burden on intra-market
competition because the counting programs within the Market Wide Risk
Protections will apply equally to all Members. The proposal to amend
the Market Wide Risk Protection does not impose an undue burden on
inter-market competition because other options exchanges may adopt
similar risk protections for their members.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Because the foregoing proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \88\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\89\
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    \88\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \89\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include
file number SR-ISE-2023-13 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-ISE-2023-13. This file

number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-ISE-2023-13 and should be
submitted on or before September 1, 2023.
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    \90\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\90\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-17208 Filed 8-10-23; 8:45 am]
BILLING CODE 8011-01-P