Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rules To List and Trade FLEX Options

Federal RegisterNov 29, 2024

Ask Donna

What actually matters in this document.

Text

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101720; File No. SR-ISE-2024-12]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rules To List and Trade FLEX Options

November 22, 2024.

On March 11, 2024, Nasdaq ISE, LLC (“ISE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”)

and Rule 19b-4 thereunder,

a proposed rule change to adopt new Options 3A that will govern the listing and trading of Flexible Exchange Options (“FLEX Options”) on the Exchange's electronic market. The proposed rule change was published for comment in the

Federal Register

on March 29, 2024.

15 U.S.C. 78s(b)(1).

17 CFR 240.19b-4.

See

Securities Exchange Act Release No. 99825, 89 FR 22294 (March 29, 2024) (“Notice”). Comments on the proposed rule change can be found at:

https://www.sec.gov/comments/sr-ise-2024-12/srise202412.htm.

On May 9, 2024, pursuant to Section 19(b)(2) of the Exchange Act,

the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.

On June 26, 2024, the Commission instituted proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act

to determine whether to approve or disapprove the proposed rule change.

On September 20, 2024, the Commission designated a longer period for Commission action on the proposed rule change.

On November 20, 2024, the Exchange submitted Amendment No. 1 to the proposed rule change, which replaced and superseded the proposed rule change as originally filed.

The Commission is publishing this notice to solicit comments on Amendment No. 1 from interested persons, and is approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis.

15 U.S.C. 78s(b)(2).

See

Securities Exchange Act Release No. 100086, 89 FR 42528 (May 15, 2024). The Commission designated June 27, 2024, as the date by which the Commission shall approve or disapprove, or institute proceedings to determine whether to approve or disapprove, the proposed rule change.

15 U.S.C. 78s(b)(2)(B).

See

Securities Exchange Act Release No. 100438, 89 FR 54886 (July 2, 2024) (Notice of Order Instituting Proceedings) (“OIP”).

See

Securities Exchange Act Release No. 101116 (September 20, 2024), 89 FR 78928 (September 26, 2024) (Extension No. 2). The Commission designated November 24, 2024, as the date by which the Commission shall approve or disapprove the proposed rule change.

On November 20, 2024, the Exchange submitted Amendment No. 1 to the proposed rule change. Amendment No. 1 is available on the Commission's website at:

https://www.sec.gov/comments/sr-ise-2024-12/srise202412-541455-1551502.pdf

(“Amendment No. 1”).

I. Self-Regulatory Organization's Description of the Proposed Rule Change, as Modified by Amendment No. 1

This Section I and II reproduces Amendment No. 1, as filed by the Exchange.

The Exchange proposes to adopt rules that will govern the listing and trading of flexible exchange options (“FLEX Options”). This Amendment No. 1 supersedes the original filing in its entirety.

The text of the proposed rule change is available on the Exchange's website at

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

The Exchange proposes to adopt rules in new Options 3A that will govern the listing and trading of FLEX Options on the Exchange's electronic market. This Amendment No. 1 supersedes the original filing in its entirety, and is being filed to better align the proposed rule change with the rules of other exchanges and provide more clarity to the proposed rule text as well as the description of and statutory basis for the proposed rule change. As discussed in further detail later in this filing, Amendment No. 1 makes a number of clarifying changes to the proposed rule text as well as the following more substantive rule text changes from the original filing: (i) excluding the iShares Bitcoin Trust ETF from FLEX trading in proposed Options 3A, Section 3(a); (ii) clarifying in proposed Options 3A, Section 3(b)(2) that on the expiration date, a FLEX Order for the expiring FLEX Option series may only be submitted to close out a position in such expiring FLEX Option series; (iii) aligning the Exchange's closing only provisions in proposed Options 3A, Section 3(d)(2) to already effective rules of other options exchanges; (iv) clarifying in proposed Options 3A, Section 5 which provisions will govern how the minimum increments for complex FLEX Orders (including complex FLEX Orders with a stock component) will be handled; (v) clarifying in proposed Options 3A, Sections 6(a) and 6(b) that only the specified order types, times-in-force, and order and quote protocols are available for FLEX trading; (vi) removing in proposed Options 3A, Section 7(b) the Exchange's discretion to determine on a class-by-class basis which complex FLEX Orders would not have to adhere to the ratio requirements for the standard complex market; (vii) adding language in proposed Options 3A, Section 11(a)(2)(A) to describe what would happen if there is a complex FLEX Order and subsequently, a non-FLEX Option series is introduced for the component leg(s), which would align to already effective rules of another options exchange; (viii) adding language in proposed Options 3A, Sections 12(a)(2) and 13(a)(2) that each leg of a complex FLEX Order must be in a permissible FLEX option series that complies with proposed Options 3; (ix) specifying in proposed Options 3A, Section 13(a)(4) that the minimum size requirement will apply to each leg of a complex FLEX Order; (x) adding in proposed Options 3A, Section 14(b) that the Price Limit for Complex Order protections as applicable to the stock component, the Stock-Tied NBBO protections, and the Stock-Tied Reg SHO protections will also be available to FLEX Options as complex order risk protections; and (xi) aligning the proposed position limits for FLEX Index Options in proposed Options 3A, Section 18(a) with the position limits for index options in the Exchange's standard index options market.

The Exchange notes that Amendment No. 1 is solely intended to further clarify the proposed rule text and conform the rule text with the already

established rules of other exchanges, and to provide additional detail and specificity with respect to the proposed rule change and additional information in support of the purpose and statutory basis for the proposed rule change.

Summary

The Exchange is proposing this new functionality be implemented in connection with a technology migration to enhanced Nasdaq, Inc. (“Nasdaq”) functionality that will result in higher performance, scalability, and more robust architecture, which will be implemented as a day 2 change after the first phase of the system migration was implemented in September 2024.

The Exchange intends to begin implementation of the proposed rule change by May 12, 2025. The delayed implementation of the proposed FLEX rules will ensure that the Exchange will have the necessary functionality in place to trade FLEX. The Exchange will issue a public notice to Exchange members (“Members”) to provide notification of the FLEX implementation date and highlight the features for FLEX proposed hereunder.

The Exchange separately proposed a number of rule filings in connection with this technology migration.

See

Securities Exchange Act Release Nos. 94897 (May 12, 2022), 87 FR 30294 (May 18, 2022) (SR-ISE-2022-11); 96362 (November 18, 2022), 87 FR 72539 (November 25, 2022) (SR-ISE-2022-25); 96518 (December 16, 2022), 87 FR 78740 (December 22, 2022) (SR-ISE-2022-28); 96818 (February 6, 2023), 88 FR 8950 (February 10, 2023) (SR-ISE-2023-06); 97605 (May 26, 2023), 88 FR 36350 (June 2, 2023) (SR-ISE-2023-10); 98066 (August 7, 2023), 88 FR 54672 (August 11, 2023) (SR-ISE-2023-13); 98443 (September 20, 2023), 88 FR 66106 (September 26, 2023) (SR-ISE-2023-19); and 98702 (October 6, 2023), 88 FR 71046 (October 13, 2023) (SR-ISE-2023-22). As per the previously announced technology migration, ISE completed its symbol migration on September 23, 2024.

See https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2024-1.

As a result and prior to any FLEX trading on ISE, the foregoing rule changes are currently all effective and operative.

As proposed, FLEX Options will be customized options contracts that will allow investors to tailor contract terms for exchange-listed equity and index options. FLEX Options will be designed to meet the needs of investors for greater flexibility in selecting the terms of options within the parameters of the Exchange's proposed rules. FLEX Options will not be preestablished for trading and will not be listed individually for trading on the Exchange. Rather, investors will select FLEX Option terms and will be limited by the parameters detailed below in their selection of those terms. As a result, FLEX Options would allow investors to specify more specific, individualized investment objectives than may be available to them in the standardized options market.

Some key features of the new electronic FLEX Options functionality are as follows:

•

System Availability:

The Exchange will not conduct an Opening Process pursuant to Options 3, Section 8 in FLEX Options.

Orders in FLEX Options may only be submitted through an electronic FLEX Auction, a FLEX Price Improvement Auction (“FLEX PIM”), or a FLEX Solicited Order Mechanism (“FLEX SOM”), each as discussed in detail below.

Accordingly, the Exchange's simple and complex order books will not be available for transactions in FLEX Options.

See

proposed Options 3A, Section 8(a). Rather, Members may begin submitting orders in FLEX Options into one of the proposed auction mechanisms (

i.e.,

electronic FLEX Auction, FLEX Price Improvement Mechanism, and FLEX Solicited Order Mechanism) once the underlying security is open for trading.

See

proposed Options 3A, Section 8(b).

See

proposed Options 3A, Section 11(a).

See

proposed Options 3A, Section 10(a).

•

Terms:

FLEX Options will be a type of put or call, and will allow investors the flexibility to choose an exercise style of American or European, an expiration date, a settlement type, and an exercise price, all within the parameters specified in the proposed rules.

As discussed further below, FLEX Options will not be permitted with identical terms as an existing non-FLEX Option series listed on the Exchange.

As discussed later in this filing, proposed Options 3A, Section 3(c) will govern FLEX Options terms.

At least one of the following terms must differ between FLEX Options and non-FLEX Options on the same underlying security: exercise date, exercise price, or exercise style.

See

proposed Options 3A, Section 3(c).

•

Priority:

As discussed in detail below within the respective sections for FLEX Auctions, FLEX PIM, and FLEX SOM, the Exchange will apply the same priority order for FLEX Options as it applies today in its standard non-FLEX market, particularly in its standard auction mechanisms such as its standard Solicited Order Mechanism and standard Price Improvement Mechanism. Specifically, the System

shall execute trading interest at the best price level within the System before executing at the next best price. Priority Customers shall have priority over non-Priority Customer interest at the same price with time priority meaning that priority shall be afforded to Priority Customer orders in the sequence in which they are received by the System. As set out in Options 1, Section 1(a)(37), the term “Priority Customer” means a person or entity that (i) is not a broker or dealer in securities, and (ii) does not place more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s).

The term “System” means the electronic system operated by the Exchange that receives and disseminates quotes, executes orders and reports transactions.

See

Options 1, Section 1(a)(50).

Because of their composition, the Exchange believes that FLEX Options may allow investors to more closely meet their individual investment and hedging objectives by customizing options contracts for the purpose of satisfying particular investment objectives that could not be met by the standardized markets.

Background

The Commission approved the trading of FLEX Options in 1993.

At the time, the Chicago Board Options Exchange, Inc., now Cboe Exchange, Inc. (“Cboe”), proposed FLEX Options based on the Standard and Poor's Corporation 500 and 100 Stock Indexes.

These FLEX Options were offered as an alternative to an over-the-counter (“OTC”) market in customized equity options.

Several years after the initial approval, the Commission approved the trading of additional FLEX Options on specified equity securities.

In its order, the Commission provided: “The benefits of the Exchanges' options markets include, but are not limited to, a centralized market center, an auction market with posted transparent market quotations and transaction reporting, parameters and procedures for clearance and settlement, and the guarantee of the OCC [Options Clearing Corporation] for all contracts traded on the Exchange.”

See

Securities Exchange Act Release No. 31920 (February 24, 1993), 58 FR 12280 (March 3, 1993) (SR-CBOE-92-17) (Order Approving and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 1, 2, 3, and 4 to Proposed Rule Changes by the Chicago Board Options Exchange, Inc., Relating to FLEX Options).

Id.

See

Securities Exchange Act Release No. 36841 (February 14, 1996), 61 FR 6666 (February 21, 1996) (SR-CBOE-95-43) (SR-PSE-95-24) (Order Approving Proposed Rule Changes and Notice of Filing and Order Granting Accelerated Approval of Amendments by the Chicago Board Options Exchange, Inc. and the Pacific Stock Exchange, Inc., Relating to the Listing of Flexible Exchange Options on Specified Equity Securities).

Id.

The Exchange notes that the Commission found pursuant to Rule 9b-1 under the Act, that FLEX Options, including FLEX Equity Options, are standardized options for purposes of the options disclosure framework established under Rule 9b-1 of the Act.

Id.

The Exchange notes that FLEX Options are currently traded on Cboe, NYSE American LLC (“NYSE American”), NYSE Arca, Inc. (“NYSE

Arca”), Nasdaq PHLX LLC (“Phlx”), and FLEX Equity Options on BOX Exchange LLC (“BOX”).

The Exchange further notes that Cboe offers electronic and open outcry FLEX Options trading while NYSE American, NYSE Arca, Phlx and BOX offer only open outcry trading of FLEX Options on their respective trading floors.

The Exchange now proposes to allow for the trading of FLEX Options on its electronic market

in a substantially similar manner as Cboe's electronic FLEX Options, with certain intended differences primarily to align to current System behavior (and especially current auction behavior) to provide increased consistency for Members trading FLEX Options and non-FLEX Options on ISE, as discussed in detail below. Further, the Exchange has omitted certain Cboe rules from the proposed rules due to differences in scope and operation of FLEX trading at Cboe compared to the proposed scope and operation of FLEX trading on ISE, each as noted below. For example, the Exchange will not include Cboe rule provisions related to open outcry trading, Asian- or Cliquet-settled FLEX index options, or FLEX index options with an index multiplier of one (“Micro FLEX Index Options”) as it does not offer these capabilities today. For the same reason, the Exchange will not allow prices in FLEX trading to be expressed as percentages under this proposal. The Exchange also will not incorporate the concept of a “FLEX Official” as this is a floor concept and the Exchange does not have a trading floor. As such, instead of nullifying FLEX Option transactions that do not conform to the terms of the Exchange's proposed FLEX rules,

the Exchange will System enforce its proposed FLEX rules and reject at the outset a FLEX Option transaction that does not conform to the terms of the proposed FLEX rules. The very few instances where the Exchange will not System-enforce the proposed FLEX rules and will instead apply its surveillance patterns will be specifically noted below.

See

Cboe Rules 4.20-4.22 and 5.70-5.75, NYSE American Rules 900G-910G, NYSE Arca Rules 5.30-O-5.41-O, Phlx Options 8, Section 34, and BOX Rules 5055 and 7605. The Exchange also notes that BOX recently received approval from the Commission to allow for the trading of FLEX equity options on the BOX trading floor.

See

Securities Exchange Act Release No. 100156 (May 15, 2024), 89 FR 44721 (May 21, 2024) (SR-BOX-2023-20).

See supra

note 23.

The Exchange is not proposing to add open outcry FLEX Options trading as it does not have a trading floor.

Cboe Rule 5.75(b) sets forth the responsibilities of FLEX Officials, including the responsibility to nullify certain FLEX Option transactions that do not conform to Cboe's FLEX rules, and to call upon a FLEX Market-Maker with an appointment in a FLEX Option class to respond to open outcry FLEX Auctions in that FLEX Option class when no other ICMPs respond. The Exchange will not adopt these provisions because a FLEX Official is a floor concept and Exchange does not have a trading floor (and therefore no open outcry auctions).

Proposal

Transactions in FLEX Options traded on the Exchange will generally be subject to the same rules that apply to the trading of equity options and index options. In order, however, to provide investors with the flexibility to designate certain of the terms of the options, and to accommodate other special features of FLEX Options and the way in which they are traded, the Exchange proposes new rules applicable to FLEX Options in new Options 3A, Sections 1-19.

A. General Provisions (Section 1)

Proposed Section 1(a) will set forth the applicability of Exchange Rules, and will provide that Options 3A Rules will apply only to FLEX Options and that trading of FLEX Options will be subject to all other Rules applicable to the trading of options on the Exchange, unless otherwise provided in Options 3A. The Exchange has conducted a thorough review of its existing trading rules to ensure that the proposed Rules in Options 3A accurately reflects the application of the Exchange's non-FLEX Option trading rules to FLEX Options,

as well as those non-FLEX Option trading rules that would not apply to FLEX Options.

For example, Options 3, Section 1 (Hours of Business) will apply to FLEX and non-FLEX Options, except the Exchange may determine to narrow or otherwise restrict the trading hours for FLEX Options.

See

proposed Options 3A, Section 2. As another example, Options 3, Section 9 (Trading Halts) will apply to FLEX and non-FLEX Options. The Exchange notes that pursuant to proposed Options 3A, Section 9, it will always halt trading in a FLEX Option class when trading in a non-FLEX Option class with the same underlying equity security or index is halted on the Exchange. Furthermore, the System does not accept a FLEX Order for a FLEX Option series while trading in a FLEX Option class is halted.

For example, the Exchange's simple and complex order books will not be available for transactions in FLEX Options. See proposed Options 3A, Section 10. In addition, FLEX Options may not trade via the Block Order Mechanism (Options 3, Section 11(a)), simple and complex Facilitation Mechanism (Options 3, Section 11(b) and (c)), or as simple and complex Customer Cross Orders (Options 3, Section 12(a) and (b)), simple and complex Qualified Contingent Cross (“QCC”) Orders (Options 3, Section 12(c) and (d)), and simple and complex QCC with Stock Orders (Options 3, Section 12(e) and (f))). If the Exchange intends to allow FLEX Options to trade via any of the foregoing auction mechanisms or as any of the foregoing crossing orders, the Exchange would be required to file a proposed rule change with the Commission to amend its FLEX rules to allow for the use of the foregoing trading functionality for FLEX Options.

Proposed Section 1(b) will set forth the definitions used specifically in Options 3A, namely that the term “FLEX Option” means a flexible exchange option. A FLEX Option on an equity security may be referred to as a “FLEX Equity Option,” and a FLEX Option on an index may be referred to as a “FLEX Index Option.” Further, the term “FLEX Order” means an order submitted in a FLEX Option pursuant to Options 3A.

The Exchange also proposes to add the definition of “FLEX Order” in Options 3, Section 7 (Order Types) in new paragraph (z). While FLEX Orders will also be defined in (and governed by) Options 3A, the Exchange believes that it will be useful to market participants to have the order types available on ISE centralized within one rule. Lastly, the Exchange proposes a non-substantive change to paragraph (y) in Options 3, Section 7 to fix a typo.

B. Hours of Business (Section 2)

Proposed Section 2(a) will provide that the trading hours for FLEX Options will be the same as the trading hours for corresponding non-FLEX Options as set forth in Options 3, Section 1, except the Exchange may determine to narrow or otherwise restrict the trading hours for FLEX Options.

Therefore, the trading hours for FLEX Options will generally be 9:30 a.m. to 4:00 p.m. Eastern time, except for certain options products that trade until 4:15 p.m. Eastern time.

This would align the proposed trading hours for FLEX Options with the current trading hours for corresponding non-FLEX Options.

See

Cboe Rule 5.1(b)(3)(A) for materially identical provisions.

See

Options 3, Section 1(c)-(e). These products are currently options on Exchange-Traded Fund Shares (as defined in Options 4, Section 3(h), options on Index-Linked Securities (as defined in Options 4, Section 3(k)(1)), and options on certain broad-based indexes, as designated by the Exchange.

As it relates to the Exchange's proposed discretion relating to the trading hours for FLEX Options, this is consistent with Cboe's FLEX Options rules as noted above. The Exchange believes that given the unique nature of FLEX, in contrast to the non-FLEX market, it is reasonable to permit the Exchange, in its discretion, to narrow or otherwise restrict the trading hours for FLEX Options, so long as such trading hours occur within the normal options trading hours of the Exchange described above. The Exchange would provide adequate advance notification to its Members of such changes in FLEX trading hours.

C. FLEX Option Classes and Permissible Series (Section 3(a) and (b))

Pursuant to proposed Section 3(a), the Exchange may authorize for trading a FLEX Option class on any equity security (except the iShares Bitcoin Trust ETF) or index if it may authorize for trading a non-FLEX Option class on that equity security or index pursuant to Options 4, Section 3 and Options 4A, Section 3,

respectively, even if the Exchange does not list that non-FLEX Option class for trading.

The Exchange proposes to exclude iShares Bitcoin Trust ETF (“IBIT”) from being eligible for trading as a FLEX Option on ISE to be consistent with the Commission's approval of IBIT options, which required the position limit for IBIT options to be 25,000 contracts.

As discussed in the position limits section below, there will generally be no position limits for FLEX Equity Options.

The Exchange therefore proposes to exclude IBIT options from being eligible to trade as a FLEX Option (namely, a FLEX ETF option) to continue to limit the position limits for IBIT options. For clarity, this exclusion will apply to both physically-settled and cash-settled FLEX ETF options (as further described in this filing), such that IBIT options will be excluded from being eligible to trade as a physically-settled or a cash-settled FLEX ETF option. If the Exchange determines to allow FLEX trading on IBIT options at a later date, it will do so by submitting a 19b-4 rule filing with the Commission.

Options 4, Section 3 provides the criteria for the listing of options on several different underlying types of securities, including, for example, securities registered with the SEC under Regulation NMS of the Act (“NMS stock”) and exchange-traded funds (“ETFs”). Options 4A, Section provides the criteria for the listing of options on indexes.

See

Cboe Rule 4.20 for materially identical provisions.

See

Securities Exchange Act Release No. 101128 (September 20, 2024), 89 FR 78942 (September 26, 2024) (SR-ISE-2024-03).

See

proposed Options 3A, Section 18(b)(1)(A).

Proposed Section 3(b) will provide that the Exchange may approve a FLEX Option series for trading in any FLEX Option class it may authorize for trading pursuant to proposed Section 3(a). FLEX Option series are not pre-established. A FLEX Option series is eligible for trading on the Exchange upon submission to the System of a FLEX Order for that series pursuant to proposed Sections 11 through 13,

subject to the following stipulations.

First, the Exchange will only permit trading in a put or call FLEX Option series that does not have the same exercise style, same expiration date, and same exercise price as a non-FLEX Option series on the same underlying security or index that is already available for trading. This would include permitting trading in a FLEX Option series before a series with identical terms is listed for trading as a non-FLEX Option series. If the Exchange lists for trading a non-FLEX Option series with identical terms as a FLEX Option series, the FLEX Option series will become fungible with the non-FLEX Option series pursuant to proposed paragraph (d) of Section 3. The System would not accept a FLEX Order for a put or call FLEX Option series if a non-FLEX Option series on the same underlying security or index with the same expiration date, exercise price, and exercise style is already listed for trading.

Second, a FLEX Order for a FLEX Option series may be submitted on any trading day prior to the expiration date.

The Exchange also proposes to clarify in proposed Section 3(b)(2) that on the expiration date, a FLEX Order for the expiring FLEX Option series may only be submitted to close out a position in such expiring FLEX Option series.

Proposed Sections 11 through 13 of Options 3A will govern the electronic FLEX Auction, FLEX PIM, and FLEX SOM, respectively. As discussed later in this filing, FLEX Orders may only be submitted through an electronic FLEX Auction, FLEX PIM, or FLEX SOM.

See

proposed Options 3A, Section 3(b), which is based on Cboe Rule 4.21(a).

See

proposed Options 3A, Section 3(b)(1), which is based on Cboe Rule 4.21(a)(1).

See

proposed Options 3A, Section 3(b)(2), which is based on Cboe Rule 4.21(a)(2). The Exchange notes that it will System enforce which options are eligible to be submitted as FLEX Options. As such, the System will reject at the outset a FLEX Option transaction that does not conform to the terms of the FLEX rules.

The Exchange will System enforce this provision such that it will reject an opening position in an expiring FLEX Option series on the day of expiration.

Third, in the event the relevant expiration is a holiday pursuant to General 3 (which incorporates Nasdaq General 3, Rule 1030 by reference),

proposed Section 3(d) will apply to options with an expiration date that is the business day immediately preceding the holiday, except for Monday-expiring Weekly Expirations (as defined in Options 4A, Section 3), in which case proposed Section 3(d) will apply to options with an expiration date that is a business day immediately following the holiday.

ISE General 3 incorporates by reference Series 1000 in General 3 of the Rules of The Nasdaq Stock Market, LLC (“Nasdaq”) (including Nasdaq Rule 1030).

See

proposed Options 3A, Section 3(b)(3), which is based on Cboe Rule 4.22(c).

D. FLEX Options Terms (Section 3(c))

Proposed Section 3(c) will specify the terms that must be included in a FLEX Order.

Specifically, when submitting a FLEX Order for a FLEX Option series to the System, the submitting Member must include one of each of the terms detailed in proposed subparagraphs (1)-(6) of Section 3(c) in the FLEX Order (all other terms of a FLEX Option series are the same as those that apply to non-FLEX Options), provided that a FLEX Equity Option overlying an ETF (cash- or physically-settled) may not be the same type (put or call) and may not have the same exercise style, expiration date, and exercise price as a non-FLEX Equity Option overlying the same ETF,

which terms constitute the FLEX Option series.

See

Cboe Rule 4.21(b) for similar provisions. The Exchange notes that unlike Cboe, it is not proposing FLEX Index Options with a multiplier of 1 (

i.e.,

Micro FLEX Index Options) or FLEX Index Options that are Asian- or Cliquet-settled as the Exchange does not have these capabilities today for index options. For the same reason, the Exchange is not proposing to allow exercise prices to be expressed as a percentage value. Therefore, the Exchange has not incorporated the applicable provisions in this Rule.

The Exchange will discuss cash-settled FLEX Equity Options overlying an ETF (“cash-settled FLEX ETFs”) later in this filing. As discussed below, the Commission previously approved a rule filing by NYSE American to permit the listing and trading of this product, and Cboe recently filed an immediately effective rule change based on NYSE American's filing.

See infra

notes 243 and 244.

As proposed, the submitting Member must specify the following terms in the FLEX Order: (1) underlying equity security or index, as applicable (the index multiplier for FLEX Index Options is 100);

(2) type of option (

i.e.,

put or call);

(3) exercise style, which may be American-style or European-style;

(4) expiration date, which may be any business day (specified to the day, month, and year) no more than 15 years from the date on which a Member submits a FLEX Order to the System;

(5) settlement type for the FLEX Equity Option or FLEX Index Option, as applicable;

and (6) exercise

price, which may be in increments no smaller than $0.01.

Further, the Exchange may determine the smallest increment for exercise prices of FLEX Options on a class-by-class basis without going lower than $0.01.

The Exchange notes that the exercise price of the FLEX Option would generally be dependent on the price of the underlying security.

See

proposed Options 3A, Section 3(c)(1), which is based on Cboe Rule 4.21(b)(1) except for the provisions relating to Micro FLEX Index Options.

See

proposed Options 3A, Section 3(c)(2), which is based on Cboe Rule 4.21(b)(2) except the provisions related to Asian-settled or Cliquet-settled FLEX Index Options.

See

proposed Options 3A, Section 3(c)(3), which is based on Cboe Rule 4.21(b)(3) except with respect to Asian-settled or Cliquet-settled FLEX Index Options.

See

proposed Options 3A, Section 3(c)(4), which is based on Cboe Rule 4.21(b)(4) except with respect to Asian-settled or Cliquet-settled FLEX Index Options.

See

proposed Options 3A, Section 3(c)(5), which is based on Cboe Rule 4.21(b)(5) except with

respect to Asian-settled or Cliquet-settled FLEX Index Options.

See

proposed Options 3A, Section 3(c)(6), which is based on Cboe Rule 4.21(b)(6) except the Exchange is not proposing Cliquet-settled Index Options or to allow exercise prices to be expressed as a percentage value.

See

proposed Options 3A, Section 3(c), which is based on Cboe Rule 4.21(b) except for the provisions allowing the exercise price to be expressed as a percentage amount and with respect to Micro FLEX Index Options. As noted above, the Exchange does not offer these capabilities today for non-FLEX index options. The Exchange will also clarify that it would not go lower than $0.01 when determining the smallest increment for exercise prices of FLEX Options to make clear that it would stay within the stated confines of this Rule.

As it relates to the settlement type for FLEX Equity Options, the Exchange proposes in subparagraph (c)(5)(A)(i) of Options 3A, Section 3 that FLEX Equity Options, other than as permitted in proposed subparagraphs (c)(5)(A)(ii) and (iii), are settled with physical delivery of the underlying security. Proposed subparagraph (c)(5)(A)(ii) will allow for the cash-settlement of certain qualifying FLEX Equity Options with an underlying security that is an ETF.

Proposed subparagraph (c)(5)(A)(iii) will provide that FLEX Equity Options are subject to the exercise by exception provisions of OCC Rule 805.

As discussed later in this filing, the Exchange is proposing to list and trade cash-settled FLEX ETFs in the same manner as NYSE American and Cboe.

As it relates to the settlement type for FLEX Index Options, the Exchange proposes in subparagraphs (c)(5)(B)(i) and (ii) of Options 3A, Section 3 that FLEX Index Options are settled in U.S. dollars, and may be either a.m.-settled (with exercise settlement value determined by reference to the reported level of the index derived from the reported opening prices of the component securities) or p.m.-settled (with exercise settlement value determined by reference to the reported level of the index derived from the reported closing prices of the component securities). The Exchange notes that Cboe recently received approval of its pilot program that permitted it to list p.m.-settled FLEX Index Options whose exercise settlement value is derived from closing prices on the last trading day prior to expiration that expire on or within two business days of a third Friday-of-the-month expiration day for a non-FLEX Option (“FLEX PM Third Friday Options”).

Consistent with the Commission's approval of Cboe's proposal, the Exchange is proposing to allow the listing of FLEX PM Third Friday Options on ISE as well, and will align proposed Section 3(c)(5)(B)(ii) with Cboe Rule 4.21(b)(5)(B)(ii).

See

Securities Exchange Act Release No. 99222 (December 21, 2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (“FLEX Settlement Pilot Approval”). In support of making the pilot a permanent program, Cboe cited to its own review of pilot data during the course of the pilot program and a study by the Commission's Division of Economic and Risk Analysis (“DERA”) staff.

See

FLEX Settlement Pilot Approval, notes 18 and 35.

The only broad-based index option that would be able to list as a FLEX PM Third Friday Option is the Nasdaq-100 Index option (“NDX” or “NDX options”) because the Exchange only received approval to list a third-Friday-of-the-month p.m. expiration on NDX options its standardized market.

See

Securities Exchange Act Release No. 98935 (November 14, 2023), 88 FR 80792 (November 20, 2023) (SR-ISE-2023-20) (Order Approving a Proposed Rule Change To Permit the Listing and Trading of P.M.-Settled Nasdaq-100 Index Options With a Third-Friday-of-the-Month Expiration).

E. FLEX Fungibility (Section 3(d))

Proposed Section 3(d)(1)(A) will provide that if the Exchange lists for trading a non-FLEX Option series with identical terms as a FLEX Option series, all existing open positions established under the FLEX trading procedures will become fully fungible with transactions in the identical non-FLEX Option series.

In addition, proposed Section 3(d)(1)(B) will provide that any further trading in the series would be as non-FLEX Options subject to non-FLEX trading procedures and Rules.

The foregoing provisions are materially identical to Cboe Rule 4.22(a)(1) and (2).

An open position resulting from a transaction on the Exchange becomes fungible post-trade and is separate from the execution occurring on the Exchange. For example, assume a Member buys one (1) American style AAPL call option expiring on October 9, 2024, with a strike price of 150, which is a FLEX series because there is no standard option listed with those same terms. Now assume, while holding this position, a standard option with the same terms is listed (American style AAPL call option expiring on October 9, 2024, with a strike price of 150). After this standard option is listed, the Member purchases one (1) contract in this non-FLEX option series. After this second transaction, the Participant will have an open position of two (2) contracts in the standard AAPL call expiring on October 9, 2024, with a 150 strike price.

This includes all priority and trade-through provisions on the Exchange.

See, e.g.,

Options 3, Section 10 and Options 5, Section 2.

Notwithstanding the above, if a non-FLEX Option series

is added intraday, for the balance of that trading day, a position established under the FLEX trading procedures may be closed using the FLEX trading procedures in this Options 3A against another closing only FLEX position. No FLEX Orders may be submitted into an electronic auction pursuant to Sections 11(b), 12, or 13 below for a FLEX Option series with the same terms as the non-FLEX Option series, unless the FLEX Order is a closing order, and it is the day on which the non-FLEX Option series was added intraday. Members may only submit responses that close out existing FLEX positions.

In the event the non-FLEX Option series is added on a trading day after the position is established, the holder or writer of a FLEX Option position established under the FLEX trading procedures would be permitted to close such position as a non-FLEX transaction consistent with the requirements of subsection (d)(1) of this rule.

The Exchange will notify Members when a FLEX Option series is restricted to closing only transactions. The System will reject a transaction in such a restricted series that does not conform to the requirements specified in proposed Options 3A, Section 3(d).

Cboe Rule 4.22(b)(1) currently indicates that Cboe's closing-only provisions apply if a non-FLEX Option

American-style

series is added intraday. The Exchange, however, believes it is more straightforward to apply the closing-only provisions to

all

non-FLEX Option series (

i.e.,

American-style and European-style FLEX Option series) instead of limiting these provisions to one type of exercise style. As such, the Exchange's proposed language in Options 3A, Section 3(d)(2)(A) will instead provide that the Exchange's closing-only provisions would apply “if a non-FLEX Option is added intraday.”

See

BOX Rule 7605(d)(3), which similarly does not limit BOX's closing-only provisions to American-style FLEX Options series.

See

proposed Options 3A, Section 3(d)(2)(A), which is based on Cboe Rule 4.22(b)(1) except the Exchange is not incorporating Cboe's provisions for open outcry trading as the Exchange does not offer open outcry trading today. The Exchange is also adding cross-cites to its electronic FLEX SOM and FLEX PIM auctions in proposed Options 3A, Sections 12 and 13 because the closing only provisions in proposed Options 3A, Section 3(d)(2) will also apply to those electronic FLEX auctions. Lastly, the Exchange notes that unlike Cboe, it is not proposing to add FLEX Index Options with a multiplier of 1 (

i.e.,

Micro FLEX Index Options) and will therefore not incorporate Cboe's closing only language with respect to Micro FLEX Index Options in Rule 4.22(b)(2).

See

proposed Options 3A, Section 3(d)(2)(B), which is materially identical to BOX Rule 5055(f)(3). The Exchange is adding this language to clarify how it would handle open FLEX positions if an identical non-FLEX Option series is added on the day after.

See

proposed Options 3A, Section 3(d)(2), which is based on Cboe Rule 4.22(b), except the Exchange is replacing the concept of “FLEX Official” from Cboe's rule to “the System” as a FLEX Official is a floor concept. As such, the Exchange will System enforce the rejection of FLEX Options that are fully fungible with a non-FLEX Option instead of following Cboe, which specifies that a FLEX Official could nullify such a transaction on Cboe.

F. Units of Trading; Minimum Trading Increments (Sections 4 and 5)

Proposed Section 4(a) of Options 3A will provide that bids and offers for

FLEX Options must be expressed in U.S. dollars and decimals in the minimum increments as set forth in proposed Section 5.

Proposed Section 5(a) will provide that the Exchange would determine the minimum increment for bids and offers on FLEX Options on a class-by-class basis, which may not be smaller than $0.01 for the options leg of a FLEX Option.

Proposed Section 5(b) will provide that for the stock leg of a FLEX Option, the minimum increments are set forth in Options 3A, Section 11(b)(1)(G), Section 12(a)(5), and Section 13(a)(5). As discussed later in this filing, the foregoing rules specify how minimum increments for complex FLEX Orders (including complex FLEX Orders with a stock component) would be handled. The Exchange is adding these cross cites in the minimum increments rule in proposed Options 3A, Section 5(b) for transparency and clarity.

See

Cboe Rule 5.3(e)(3) for similar provisions, except the Exchange is not proposing to allow prices to be expressed as a percentage value, or to provide for Micro FLEX Index Options.

See

Cboe Rule 5.4(c)(4) for similar provisions, except the Exchange is not proposing to allow prices to be expressed as a percentage value. The Exchange is also clarifying that this provision would apply to the options leg of a FLEX Option.

G. Types of Orders; Order and Quote Protocols (Section 6)

Pursuant to proposed Section 6(a), the Exchange may determine to make only the Limit Order and Cancel and Replace Order order types

and Immediate or Cancel times-in-force,

respectively, in Options 3, Section 7 available on a class or System basis for FLEX Orders.

The Exchange notes that it currently has the authority to make certain order types and TIFs available on a class or System basis for non-FLEX Options pursuant to Options 3, Section 7, and therefore proposes to have similar authority with respect to FLEX Options.

See

Options 3, Sections 7(b) and 7(f) for a description of Limit Orders and Cancel and Replace Orders, respectively. All of the other order types listed in Options 3, Section 7 (such as Customer Cross Orders, Qualified Contingent Cross Orders, QCC with Stock Orders, Block Orders, and Facilitation Orders) do not apply to FLEX.

See

Supplementary Material .02(d) to Options 3, Section 7 for a description of Immediate-or-Cancel. All of the other TIFs in Supplementary Material .02 to Options 3, Section 7 will not apply to FLEX.

See

Options 3, Section 7 for descriptions of these order types and times-in-force.

Proposed Section 6(b) will provide that only the following order and quote protocols in Supplementary Material .03 to Options 3, Section 7 will be available for FLEX Orders, FLEX auction notifications, and FLEX auction responses:

Notes 58-60 below describe what features are available on these protocols today for non-FLEX Options. The Exchange is proposing to specify that some of these features (

i.e.,

sending/receiving FLEX Orders, FLEX notifications and FLEX responses) will be available for FLEX Options through the specified protocols as described above. While other basic features will be available for FLEX Options (for example, the options symbol directory will be available for FLEX Options), the Exchange is proposing to specify the particular features in proposed Options 3A, Section 6(b) to highlight the most important features that would be available through these protocols for FLEX trading.

• FIX:

FLEX Orders and FLEX auction responses

“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.

• OTTO:

FLEX Orders, FLEX auction notifications, and FLEX auction responses

“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.

• SQF:

FLEX auction notifications and FLEX auction responses

“Specialized Quote Feed” or “SQF” is an interface that allows Market Makers to connect, send, and receive messages related to quotes, Immediate-or-Cancel Orders, and auction responses to the Exchange. Features include the following: (1) options symbol directory messages (

e.g.,

underlying and complex instruments); (2) System event messages (

e.g.,

start of trading hours messages and start of opening); (3) trading action messages (

e.g.,

halts and resumes); (4) execution messages; (5) quote messages; (6) Immediate-or-Cancel Order messages; (7) risk protection triggers and purge notifications; (8) opening imbalance messages; (9) auction notifications; and (10) auction responses. The SQF Purge Interface only receives and notifies of purge requests from the Market Maker. Market Makers may only enter interest into SQF in their assigned options series.

See

Supplementary Material .03(c) to Options 3, Section 7.

H. Complex Orders (Section 7)

Pursuant to proposed Section 7(a), the Exchange may make complex orders, including a Complex Options Order,

Stock-Options Order,

and Stock-Complex Order

available for FLEX trading. Complex FLEX Orders may have up to the maximum number of legs determined by the Exchange.

Each leg of a complex FLEX Order: (1) must be for a FLEX Option series authorized for FLEX trading with the same underlying equity security or index; (2) must have the same exercise style (American or European); and (3) for a FLEX Index Option, may have a different settlement type (a.m.-settled or p.m.-settled).

The Exchange notes that a non-FLEX complex order can have both am-settled and p.m.-settled legs today. The Exchange received approval to permit the listing and trading of p.m.-settled NDX options pursuant to Supplementary Material .07 to Options 4A, Section 12.

Specifically, the Exchange is permitted to list p.m.-settled NDX options that expire (1) on any Monday, Tuesday, Wednesday, Thursday, or Friday (other than the third Friday-of-the-month or days that coincide with an end-of-month expiration)

or (2) on the last day of the

trading month.

In addition, NDX options are also currently allowed to be listed as a.m.-settled with a standard expiration (

i.e.,

the third-Friday-of-the-month).

Therefore, ISE may currently list NDX options that are both a.m.-settled and p.m.-settled for its non-FLEX market. As such, the Exchange's FLEX proposal for complex orders in this respect will not only align with Cboe's current FLEX complex order functionality as noted above,

but will also align with its own current non-FLEX complex order functionality.

A Complex Options Order is an order for a Complex Options Strategy, which is the simultaneous purchase and/or sale of two or more different options series in the same underlying security, for the same account, in a ratio that is equal to or greater than one-to-three (.333) and less than or equal to three-to-one (3.00) and for the purpose of executing a particular investment strategy.

See

Options 3, Section 14(a)(1).

A Stock-Option Order is an order for a Stock-Option Strategy, which is the purchase or sale of a stated number of units of an underlying stock or a security convertible into the underlying stock (“convertible security”) coupled with the purchase or sale of options contract(s) on the opposite side of the market representing either (A) the same number of units of the underlying stock or convertible security, or (B) the number of units of the underlying stock necessary to create a delta neutral position, but in no case in a ratio greater than eight-to-one (8.00), where the ratio represents the total number of units of the underlying stock or convertible security in the option leg to the total number of units of the underlying stock or convertible security in the stock leg.

See

Options 3, Section 14(a)(2).

A Stock-Complex Order is an order for a Stock-Complex Strategy, which is the purchase or sale of a stated number of units of an underlying stock or a security convertible into the underlying stock (“convertible security”) coupled with the purchase or sale of a Complex Options Strategy on the opposite side of the market representing either (A) the same number of units of the underlying stock or convertible security, or (B) the number of units of the underlying stock necessary to create a delta neutral position, but in no case in a ratio greater than eight-to-one (8.00), where the ratio represents the total number of units of the underlying stock or convertible security in the option legs to the total number of units of the underlying stock or convertible security in the stock leg.

See

Options 3, Section 14(a)(3).

The Exchange will initially permit a maximum of 10 legs.

See

Cboe Rule 5.70(b) for similar provisions except the Exchange is not proposing Asian-settled or Cliquet-settled FLEX Index Options, as currently specified in Cboe Rule 5.70(b)(3).

See

Securities Exchange Act Release No. 98450(September 20, 2023), 88 FR 66111 (September 26, 2023) (SR-ISE-2023-08) (Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Make Permanent Certain P.M.-Settled Pilots).

See

Supplementary Material .07(a) to Options 4A, Section 12.

See

Supplementary Material .07(b) to Options 4A, Section 12.

See

Options 4A, Section 12(a)(5).

See supra

note 73.

Pursuant to proposed Section 7(b), complex FLEX Orders will not have to adhere to the ratio requirements in Options 3, Sections 14(a)(1)-(3). Options 3, Sections 14(a)(1)-(3) currently includes the complex ratio requirements for Complex Options Strategies, Stock-Options Strategies, and Stock-Complex Strategies.

The Exchange is not changing the complex ratio requirements for non-FLEX complex orders under this proposal. Instead, it is proposing to offer this feature only for complex FLEX Orders so that Members may submit complex FLEX Orders with any ratio.

The Exchange notes that Cboe currently permits complex FLEX Orders to be submitted with any ratio.

See supra

notes 69-71.

For instance, the Exchange may permit Complex Options Strategies with a ratio on the options legs less than one-to-three (.333) or greater than three-to-one (3.00), and Stock-Option Strategies with a ratio greater than eight-to-one (8.00), where the ratio represents the total number of units of the underlying stock or convertible security in the option leg(s) to the total number of units of the underlying stock or convertible security in the stock leg.

See

Cboe US Options Complex Book Process, Section 2.1 (Ratios) and Section 3 (Complex FLEX Order Functionality), available at

https://cdn.cboe.com/resources/membership/US-Options-Complex-Book-Process.pdf.

For its non-FLEX market, the Exchange will continue to require non-FLEX complex orders to adhere to the complex ratios in Options 3, Sections 14(a)(1)-(3), and therefore will not permit non-FLEX complex orders to be submitted in any ratio outside of those stipulated in Section 14.

I. Opening of FLEX Trading (Section 8)

Proposed Section 8(a) will specify that there will be no Opening Process

pursuant to Options 3, Section 8 in FLEX Options. Instead, as specified in proposed Section 8(b), Members may begin submitting FLEX Orders into an electronic FLEX Auction pursuant to proposed Section 11(b), a FLEX PIM pursuant to proposed Section 12, or a FLEX SOM pursuant to proposed Section 13 when the underlying security is open for trading.

The Exchange will also make clear in proposed Section 8(b) that for FLEX Index Options, the term “underlying security” will have the same meaning as defined in Options 4A, Section 2(q).

As described in Options 3, Section 8(c)(i), ISE's “Opening Process” for an option series is conducted pursuant to Options 3, Section 8 paragraphs (f)-(j), on or after 9:30 a.m. Eastern Time if the Away Best Bid or Offer, if any, is not crossed and the System has received, within two minutes of the opening trade or quote on the market for the underlying security, a Valid Width Quote. The System will accept a Primary Market Maker's Valid Width Quote or the Valid Width Quote of at least one Competitive Market Maker. The term “Away Best Bid or Offer” or “ABBO” means the displayed National Best Bid or Offer not including the Exchange's Best Bid or Offer.

See

Options 1, Section 1(a)(4).

See

proposed Options 3A, Section 8(a) and (b), which is based on Cboe Rule 5.71 except with respect to open outcry trading and trading sessions outside of regular trading hours.

Options 4A, Section 2(q) states that the term “underlying security” or “underlying securities” with respect to an index options contract means any of the securities that are the basis for the calculation of the index.

Because market participants incorporate transaction prices of underlying securities or the values of underlying indexes when pricing options (including FLEX Options), the Exchange believes that it will benefit investors for FLEX Options trading to not be available until that information has begun to be disseminated in the market (

i.e.,

when the security opens for trading).

Additionally, the Exchange's Opening Process is used to open or reopen a series of options on ISE at a single opening price.

There is a period of time before an options series opens during which orders placed on the Exchange's order book do not generate trade executions but may participate in the Opening Process.

As noted above, FLEX Options will not be placed on the Exchange's simple and complex order books and therefore will not have an Opening Process.

FLEX Options are created with terms unique to individual investment objectives. As such, each investor may require FLEX Options with slightly different terms than those already created. These individually defined FLEX Options are customized for each investor, so the Opening Process may not be useful for investors who may create their own FLEX Options because the Opening Process is designed, in part, to determine a single opening, or reopening, price based on orders and quotes from multiple Members. With the bespoke nature of FLEX Options, there is not the opportunity, nor the need, to bring together multiple orders and quotes as part of an Opening Process.

See

Options 3, Section 8(h) and (j).

See

Options 3, Section 8(c).

See

proposed Options 3A, Section 10(a). Instead, Members will be required to submit FLEX Orders into an electronic FLEX Auction, FLEX PIM, or FLEX SOM.

See

proposed Options 3A, Section 11(a).

J. Trading Halts (Section 9)

Proposed Section 9 will provide that the Exchange may halt trading in a FLEX Option class pursuant to Options 3, Section 9, and always halts trading in a FLEX Option class when trading in a non-FLEX Options class with the same underlying equity security or index is halted on the Exchange. The System will not accept a FLEX Order for a FLEX Option series while trading in a FLEX Option class is halted.

See

Cboe Rule 4.21(a)(3) for materially identical provisions.

K. Exchange Order Books (Section 10)

Proposed Section 10 will provide that the Exchange's simple and complex order books will not be available for transactions in FLEX Options. Accordingly, FLEX Options may only be traded on the Exchange by submitting FLEX Orders into a FLEX Electronic Auction pursuant to proposed Options 11(b), FLEX PIM pursuant to proposed Options 12, and FLEX SOM pursuant to proposed Options 13, each as discussed further below. The Exchange notes that its proposal is in line with other options exchanges' FLEX rules that do not contemplate the interaction of their respective order books with FLEX transactions.

See e.g.,

NYSE Arca Rule 5.30-O(c).

See also

Securities Exchange Act Release No. 87235 (October 4, 2019), 84 FR 54671 (October 10, 2019) (SR-CBOE-2019-084) (among other changes, eliminating the availability of an electronic book for FLEX Options).

L. FLEX Options Trading (Section 11)

Proposed Section 11 will describe the procedures for FLEX trading on the Exchange. Specifically, a FLEX Option series will only be eligible for trading if a Member submits a FLEX Order for that series into an electronic FLEX Auction pursuant to proposed paragraph (b) of Options 11, or submits the FLEX Order to a FLEX PIM or FLEX SOM Auction pursuant to proposed Section 12 or Section 13, respectively.

See

proposed Options 3A, Section 11(a), which is based on Cboe Rule 5.72(b) except the Exchange is not proposing an open outcry FLEX Auction.

Proposed Section 11(a)(1) and (2) will specify the requirements for both simple and complex FLEX Orders.

• For a simple FLEX Order, a FLEX Order for a FLEX Option series submitted to the System must include all terms for a FLEX Option series set forth in proposed Section 3 as described

above, size, side of the market, and a bid or offer price.

The Exchange also proposes that the System will not accept a FLEX Order with identical terms as a non-FLEX Option series that is already listed for trading to signify that this requirement is System-enforced.

See

Cboe Rule 5.72(b)(1) for similar provisions. The Exchange does not have an analogous rule as Cboe Rule 5.7, which specifies the different trading sessions during which the system is available to receive FLEX orders, and thus has not incorporated the applicable language. As noted above, the Exchange will accept FLEX Orders entered into an electronic FLEX Auction, FLEX PIM or FLEX SOM when the underlying security is open for trading.

See

proposed Options 3A, Section 8.

• For a complex FLEX Order, a FLEX Order for a FLEX Option complex strategy submitted to the System must satisfy the criteria for a complex FLEX Order set forth in proposed Section 7(a) as described above, and include size, side of the market, and a net debit or credit price. Additionally, each leg of the FLEX Option complex strategy must include all terms for a FLEX Option series set forth in proposed Section 3.

Similar to simple FLEX Orders, the Exchange proposes to System enforce the stipulation that it will not accept a FLEX Option complex strategy if a leg in the order has identical terms as a non-FLEX Option series that is already listed for trading.

The Exchange also proposes to add similar language as BOX to describe what would happen if there is a complex FLEX Order and subsequently, a non-FLEX Option series is introduced for the component leg(s). Specifically, proposed Section 11(a)(2)(A)(i) and (ii) will provide that if a non-FLEX Option series is added intra-day for a component leg(s) of a complex FLEX Order, the holder or writer of a FLEX Option position in the component leg(s) resulting from such complex FLEX Order would be permitted to close its position(s) under the FLEX trading procedures against another closing only FLEX Option position for the balance of the trading day on which the non-FLEX Option series is added. If a non-FLEX Option series is added for a component leg(s) of a complex FLEX Order on a trading day after the complex FLEX Order position is established, the holder or writer of a FLEX Option position in the component leg(s) resulting from such complex FLEX Order would be required to execute separate FLEX Option and non-FLEX Option transactions to close its position(s), such that FLEX Option component leg(s) would trade under the FLEX trading procedures and non-FLEX Option component leg(s) would trade subject to the non-FLEX trading procedures and rules.

Additionally, a complex FLEX Order submitted into the System for an electronic FLEX Auction pursuant to proposed Section 11(b), a FLEX PIM pursuant to Section 12, or a FLEX SOM pursuant to Section 13 must include a bid or offer price for each leg, which leg prices when combined must equal the net price of the complex FLEX Order.

See

Cboe Rule 5.72(b)(2) for similar provisions. As noted above for simple FLEX Orders, the Exchange does not have an analogous rule as Cboe Rule 5.7, and thus has not incorporated the applicable language.

See supra

note 91.

See

proposed Options 3A, Section 11(a)(2)(A).

See

proposed Options 3A, Section 11(a)(2)(A)(i) and (ii), which is materially identical to BOX Rule 7605(d).

See

proposed Options 3A, Section 11(a)(2)(B), which is based on Cboe Rule 5.72(b)(2)(A) except the Exchange will also add references to FLEX PIM and FLEX SOM for accuracy and completeness. The Exchange will also clarify in its proposed rule that the leg prices

when combined must equal

the net price

of the complex FLEX Order

(additions emphasized). Cboe's rule currently states that the leg prices “must add together to equal” the net price. However, the Exchange notes that sell legs of a complex order are subtracted, and therefore proposes the language in Options 3A, Section 11(a)(2)(B) (instead of copying Cboe Rule 5.72(b)(2)(A)) for greater accuracy.

Proposed Section 11(b) will describe the electronic FLEX Auction. The proposed FLEX Auction will be substantially similar to Cboe's electronic FLEX Auction set forth in Cboe Rule 5.72(c), except for certain intended differences as further described below.

Specifically, a Member may electronically submit a FLEX Order (simple or complex) into an electronic FLEX Auction for execution pursuant to this paragraph (b). Pursuant to proposed subparagraph (b)(1), a FLEX Auction may be initiated if all of the below conditions in proposed subparagraph (b)(1)(A)-(G) are met; otherwise, the System rejects or cancels a FLEX Order that does not meet the conditions in this subparagraph (b)(1).

See also

Securities Exchange Act Release No. 87235 (October 4, 2019), 84 FR 54671 (SR-CBOE-2019-084) (October 10, 2019) (adopting an electronic FLEX Auction on Cboe, among other changes).

Proposed paragraph (b) is based on Cboe Rule 5.72(c). The proposed eligibility requirements for the FLEX Auction in subparagraph (b)(1) are similar to Cboe Rule 5.72(c)(1), except as noted below.

•

Class:

The FLEX Order is in a class of options the Exchange is authorized to list for trading on the Exchange.

•

Size:

There is no minimum size for FLEX Orders.

•

Terms:

A simple or complex FLEX Order must comply with proposed Section 11(a).

•

Price:

The bid or offer price, or the net debit or credit price, as applicable, of the FLEX Order is the “auction price.”

•

Time:

A FLEX Order may only be submitted for electronic execution in a FLEX Auction after FLEX trading has opened pursuant to proposed Section 8.

•

Exposure Interval:

The submitting Member must designate the length of the “exposure interval,” which must be between three seconds and five minutes.

If the designated time exceeds the market close, then the FLEX Auction will end at the market close with an execution, if an execution is permitted pursuant to proposed Section 11(b).

There will be no default setting to the FLEX Auction exposure interval. As such, Members will be required to specify the exposure interval; otherwise, their FLEX Order will be rejected by the System.

Cboe Rule 5.72(c)(1)(F) does not specify whether an execution would occur (if permitted) when the designated time exceeds the market close, and only expressly prohibits the designated time from going beyond the market close. While the Exchange's rules are silent in this regard, the Exchange notes that its proposal will follow current non-FLEX auction behavior, including current PIM and SOM behavior. In doing so, the Exchange's proposal will promote executions in electronic FLEX Auctions (instead of cancelling the FLEX Order) and also prevent executions that occur after the market close.

•

Minimum Increment:

The price of a simple FLEX Order must be in an increment the Exchange determines on a class basis (which may not be smaller than the amounts set forth in proposed Section 5 (

i.e.,

$0.01)). If the FLEX Order is a complex order, the price must be a net price for the complex strategy.

100

The foregoing rule proposal will be substantially similar to the minimum increment requirements in Cboe Rules 5.73(a)(5) and 5.74(a)(5). While the Exchange will align to Cboe's minimum increment requirements (

i.e.,

$0.01) for the individual options legs of a complex FLEX Order entered into a FLEX Auction, the Exchange also proposes to align the minimum increment requirements for stock-tied FLEX complex strategies with the existing requirements for stock-tied non-FLEX complex strategies as set forth in Options 3, Section 14(c)(1). As such, proposed Options 3A, Section 11(b)(1)(G) will further provide that the prices of Complex Options Strategies (as defined in Options 3, Section 14) may

be expressed in one cent ($0.01) increments, and the options leg of Complex Options Strategies may be executed in no smaller than one cent ($0.01) increments, regardless of the minimum increments otherwise applicable to the individual options legs of the order. Prices of Stock-Option Strategies or Stock-Complex Strategies (each as defined in Options 3, Section 14) may be expressed in any decimal price determined by the Exchange,

101

and the stock leg of a Stock-Option Strategy or Stock-Complex Strategy may be executed in any decimal price permitted in the equity market. The options leg of a Stock-Option Strategy or Stock-Complex Strategy may be executed in no smaller than one cent ($0.01) increments, regardless of the minimum increments otherwise applicable to the individual options legs of the order. Similar to stock-tied complex orders today, the Exchange believes that smaller minimum increments are appropriate for complex FLEX Orders that contain a stock component as the stock component can trade at finer decimal increments permitted by the equity market.

100

See

proposed subparagraph (G) of Section 11(b)(1). While Cboe's electronic FLEX Auction eligibility requirements in Rule 5.72(c)(1) are silent on minimum increments, the eligibility requirements for Cboe's FLEX AIM and FLEX SAM in Cboe Rules 5.73(a)(5) and 5.74(a)(5), respectively, address minimum increments. The Exchange believes it will be helpful to add a similar requirement for electronic FLEX Auctions for greater consistency and clarity. The Exchange also notes that unlike Cboe, it is not proposing to allow exercise prices to be expressed as percentages, and will therefore not incorporate the applicable provisions. As discussed above, the Exchange is also incorporating within proposed subparagraph (G) the minimum increment provisions for non-FLEX complex orders that are stock-tied from Options 3, Section 14(c)(1).

101

The minimum increment for individual options leg of a FLEX Order may not be smaller than $0.01, as required under proposed Options 3A, Section 5. However, when a stock leg is included in a complex strategy (

i.e.,

Stock-Option Strategy or Stock-Complex Strategy) for the FLEX Option, then the price for FLEX Stock-Option Strategies and FLEX Stock-Complex Strategies can be expressed to four decimal places in order to trade at finer decimal increments permitted by the equity market. However, the options leg will not be permitted to execute in increments smaller than one cent ($0.01). This is identical to how a non-FLEX Stock-Option Strategy and a non-FLEX Stock-Complex Strategy can be priced today.

See

Options 3, Section 14(c)(1) for identical provisions.

See also

Securities Exchange Act Release No. 84373 (October 5, 2018), 83 FR 51730 at 51732 (October 12, 2018) (SR-ISE-2018-56).

Proposed subparagraph (b)(2) of Options 11 will describe the FLEX Auction process, and will provide that upon receipt of a FLEX Order that meets the conditions in subparagraph (a) as described above, the FLEX Auction commences. Proposed subparagraph (b)(2)(A) will describe the contents of the FLEX Auction message, and will provide that the System initiates a FLEX Auction by sending a FLEX Auction notification message to Members detailing the FLEX Option series or complex strategy (as applicable), side, size, auction ID,

102

capacity, and exposure interval. Similar to all other auction notifications, FLEX Auction notification messages are not disseminated to OPRA.

103

Like Cboe, the FLEX Auction message will not include the price of the auctioned FLEX Order. The Exchange believes not including the auction price in the notification message will encourage Members to respond with the best prices at which they are willing to trade against the auctioned FLEX Order. If the message included the price, Members may only respond to trade at that price; without the price, Members may respond at better prices, which may result in price improvement opportunities for the auctioned FLEX Order.

102

As discussed below, this information on the proposed auction message will permit responses to only execute at the conclusion of the auction into which the responses were submitted.

103

See

Cboe Rule 5.72(c)(2)(A) for similar provisions, except with respect to the exposure interval and Attributable designation. The Exchange will simply disseminate the duration of the exposure interval, instead of calculating and disseminating what time the auction will conclude like Cboe. In addition, the Exchange is not proposing to offer an Attributable designation for FLEX Orders like Cboe does today.

Proposed subparagraph (b)(2)(B) will provide that one or more FLEX Auctions in the same FLEX Option series or complex strategy (as applicable) may occur at the same time. To the extent there is more than one FLEX Auction in a FLEX Option series or complex strategy (as applicable) underway at the same time, the FLEX Auctions conclude sequentially based on the times at which each FLEX Auction's exposure interval concludes. At the time each FLEX Auction concludes, the System allocates the FLEX Order pursuant to proposed subparagraph (3) and takes into account all FLEX responses submitted during the exposure interval.

104

Generally, if a Member attempts to initiate an electronic FLEX Auction in a FLEX Option series while another auction in that series is ongoing, the Exchange believes it will provide that second FLEX Order with an opportunity for execution in a timely manner by initiating another FLEX Auction, rather than having the Member wait for the first auction to conclude. The second Member may not be able to submit a response to trade in the ongoing FLEX Auction, because the terms may not be consistent with that Member's order (for example, there may not be sufficient size, and the Member may only receive a share of the auctioned order depending on other responses). Therefore, the Exchange believes providing this proposed functionality may encourage Members to use electronic FLEX Auctions to execute their FLEX Orders.

104

See

Cboe Rule 5.72(c)(2)(B) for materially identical provisions.

Proposed subparagraph (b)(2)(C) will provide that the submitting Member may cancel a FLEX Auction prior to the end of the exposure interval.

105

Proposed subparagraph (b)(2)(D) will specify the conditions for submitting responses to a FLEX Auction. Any Member (including the submitting Member) may submit responses to a FLEX Auction that are properly marked specifying the FLEX Option series or complex strategy (as applicable), bid or offer price or net price (respectively), size, side of the market, and the auction ID for the FLEX Auction to which the Member is submitting the response. A FLEX response may only participate in the FLEX Auction with the auction ID specified in the response, which is why the auction notification message described above will include an auction ID and responses must identify the applicable auction ID.

106

If there are concurrent FLEX Auctions occurring, a Member may submit responses to all ongoing auctions, and thus concurrent auctions will not hinder a Member's ability to participate in any FLEX Auction.

105

See

Cboe Rule 5.72(c)(2)(C) for materially identical provisions. The Exchange notes that submitting Members may cancel but not modify a FLEX Auction prior to the end of the exposure interval.

106

See

Cboe Rule 5.72(c)(2)(D) for materially identical provisions.

A Member using the same badge/

107

mnemonic

108

may only submit a single FLEX response per auction ID to a FLEX Auction.

109

If an additional FLEX response is submitted for the same auction ID from the same badge/mnemonic, then that FLEX response will automatically replace the previous FLEX response.

110

The System caps the size of a FLEX response for the same badge/mnemonic at the size of the FLEX Order (

i.e.,

the System ignores the size in excess of the size of the FLEX Order when processing the FLEX Auction).

111

Given that the Exchange is proposing below to apply a pro-rata allocation methodology to executions at the conclusion of the FLEX Auction, this provision is intended to prevent a Member from submitting a response with an extremely large size into the electronic FLEX Auction in order to obtain a larger pro-rata share of the FLEX Order.

107

A “badge” shall mean an account number, which may contain letters and/or numbers, assigned to Market Makers. A Market Maker account may be associated with multiple badges.

See

Options 1, Section 1(a)(5).

108

A “mnemonic” shall mean an acronym comprised of letters and/or numbers assigned to Electronic Access Members. An Electronic Access Member account may be associated with multiple mnemonics.

See

Options 1, Section 1(a)(23).

109

A badge and mnemonic are essentially Member identifiers. Every order that comes into the System is tied to a badge or mnemonic.

110

In other words, the Member does not have to cancel the previous FLEX response before submitting an additional one as the previous response is

automatically

replaced.

See

proposed Options 3A, Section 11(b)(2)(D)(i), which is based on Cboe Rule 5.72(c)(2)(D)(i) except the Exchange will not allow Members to submit multiple FLEX responses using the same badge/mnemonic, and will not aggregate all of the Member's FLEX responses. While not specified in the Exchange's current rules, this is consistent with current auction behavior, including current PIM and SOM behavior.

111

See

proposed Options 3A, Section 11(b)(2)(D)(ii), which is based on Cboe Rule

5.72(c)(2)(D)(ii) except the Exchange will not aggregate all of the Member's FLEX responses.

See supra

note 110.

Further, FLEX responses must be on the opposite side of the market as the FLEX Order. The System rejects a FLEX response on the same side of the market as the FLEX Order.

112

FLEX responses are not visible to Members or disseminated to OPRA.

113

This is consistent with how Cboe treats FLEX responses pursuant to Cboe Rule 5.72(c)(2)(D)(iv). The proposed rule change is also consistent with the Exchange's existing auctions, in which responses are not visible to the market.

114

Responses to electronic auctions are not firm prior to the conclusion of the auction, at which time their price and size are firm. For the same reason as the Exchange is proposing not to disseminate the auction price on the auction notification message as discussed above, the Exchange believes it will encourage Members to submit responses at their best possible price if they do not know the prices at which other Members are willing to trade.

115

112

See

proposed Options 3A, Section 11(b)(2)(D)(iii), which is based on Cboe Rule 5.72(c)(2)(D)(iii).

113

See

proposed Options 3A, Section 11(b)(2)(D)(iv), which is based on Cboe Rule 5.72(c)(2)(D)(iv).

114

See

Supplementary Material .02 to Options 3, Section 11; and Options 3, Section 13(c)(4).

115

For example, if during a FLEX Auction of a buy FLEX Order, a Member submitted a response to sell at $1.05, if another Member saw that response, it may merely respond to sell at $1.05, or maybe $1.04, even though it may ultimately be willing to sell at $1.03. Without seeing the other responses, the second Member may instead submit a response to sell at $1.03, which could result in price improvement for the auctioned order.

A Member may modify or cancel it FLEX Responses during the exposure interval.

116

The minimum price increment for FLEX responses is the same as the one the Exchange determines for a class pursuant to proposed subparagraph (b)(1)(G) above. A response to a FLEX Auction of a complex order must have a net price. The System rejects a FLEX response that is not in the applicable minimum increment.

117

116

See

proposed Options 3A, Section 11(b)(2)(D)(v), which is based on Cboe Rule 5.72(c)(2)(D)(v).

117

See

proposed Options 3A, Section 11(b)(2)(D)(vi). While Cboe's electronic FLEX Auction response requirements in Rule 5.72(c)(2)(D) are silent on minimum increments, the response requirements for Cboe's FLEX AIM and FLEX SAM in Cboe Rules 5.73(c)(5)(A) and 5.74(c)(5)(A), respectively, have similar provisions. The Exchange believes it will be helpful to add a similar requirement for electronic FLEX Auction responses for greater consistency and clarity. The Exchange also notes that unlike Cboe, it is not proposing to allow percentage formats for exercise prices of FLEX Options, and will therefore not incorporate the applicable provisions.

Pursuant to proposed subparagraph (b)(3) of Section 11, the FLEX Auction concludes at the end of the exposure interval, unless the Exchange halts trading in the affected underlying or the submitting Member cancels the FLEX Auction before the end of the exposure interval, in which case the FLEX Auction concludes without execution.

118

At the conclusion of the FLEX Auction:

118

See

Cboe Rule 5.72(c)(3) for similar provisions, except the Exchange is making minor modifications to replace “affected series” with “affected underlying” and to specify that the submitting Member has to cancel the FLEX Auction before the end of the exposure period. The foregoing changes are merely clarifications to better articulate the functionality.

• Pursuant to proposed subparagraph (b)(3)(A), the System executes the FLEX Order against the FLEX responses at the best price(s), to the price at which the balance of the FLEX Order or the FLEX responses can be fully executed (the “final auction price”). For purposes of ranking FLEX responses when determining how to allocate a FLEX Order, the term “price” refers to the dollar and decimal amount of the response bid or offer.

119

See

Cboe Rule 5.72(c)(3)(A) for similar provisions, except the Exchange is not proposing to allow percentage values of the response bid or offer.

• Pursuant to proposed subparagraph (b)(3)(A)(i), if there are multiple FLEX responses at the same price level, then the contracts in those FLEX responses are allocated proportionally according to Size Pro-Rata Priority

120

with Priority Customer

121

overlay

122

(as described in Options 3, Section 10(c)(1)(A)). The Exchange notes that this is similar to Cboe Rule 5.72(c)(3)(A)(i), except Cboe applies no overlays to its size pro-rata allocation methodology whereas the Exchange will apply an overlay for Priority Customers on top of its standard size pro-rata allocation methodology. This is consistent with the Exchange's standard allocation methodology in its SOM and PIM for non-FLEX Options where the Priority Customer gets priority treatment over non-Priority Customers.

123

120

Size Pro-Rata Priority shall mean that if there are two or more resting orders or quotes at the same price, the System allocates contracts from an incoming order or quote to resting orders and quotes beginning with the resting order or quote displaying the largest size proportionally according to displayed size, based on the total number of contracts displayed at that price.

See

Options 3, Section 10(c).

121

The term “Priority Customer” means a person or entity that (i) is not a broker or dealer in securities, and (ii) does not place more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s). See Options 1, Section 1(a)(37).

122

Priority Customer overlay mean that the highest bid and lowest offer shall have priority except that Priority Customer orders shall have priority over non-Priority Customer interest at the same price in the same options series. If there are two or more Priority Customer orders for the same options series at the same price, priority shall be afforded to such Priority Customer orders in the sequence in which they are received by the System.

See

Options 10, Section 10(c)(1)(A).

123

See, e.g.,

Options 3, Section 11(d)(3)(C) (SOM allocation methodology) and Options 3, Section 13(d) (PIM allocation methodology).

• Pursuant to proposed subparagraph (b)(3)(A)(ii), the executable quantity is allocated to the nearest whole number, with fractions rounded up for the FLEX response with the higher quantity. Further, proposed subparagraph (b)(3)(A)(iii) will provide that if an allocation would result in less than one contract, then one contract will be allocated. The Exchange is not adopting the rounding and allocation language in Cboe Rule 5.72(c)(3)(A)(ii) and (iii), but is rather adopting language that is consistent with its current rounding and allocation methodology as the Exchange does not allocate fractional contracts and instead rounds up to the nearest whole number.

124

See

Options 3, Section 10(c), Supplementary Material .09 to Options 3, Section 11, and Supplementary Material .10 to Options 3, Section 13.

Pursuant to proposed subparagraph (b)(3)(B), the System cancels an unexecuted FLEX Order (or unexecuted portion).

125

Further, proposed subparagraph (b)(3)(C) will provide that the System cancels any unexecuted responses (or unexecuted portions).

126

125

See

Cboe Rule 5.72(c)(3)(B) for materially identical provisions.

126

See

Cboe Rule 5.72(c)(3)(C) for materially identical provisions.

M. FLEX PIM (Section 12)

The Exchange proposes to establish PIM auction functionality for FLEX Options in Options 3A, Section 12. The proposed FLEX PIM auction will be substantially similar to Cboe's FLEX AIM in Cboe Rule 5.73, except for certain intended differences as further described below. Pursuant to proposed Section 12, a Member (the “Initiating Member”) may electronically submit for execution an order (which may be a simple or complex order) it represents as agent (“Agency Order”) against

principal interest or a solicited order(s) (except, if the Agency Order is a simple order, for an order for the account of any FLEX Market Maker with an appointment in the applicable FLEX Option class on the Exchange) (an “Initiating Order”), provided it submits the Agency Order for electronic execution into a FLEX PIM auction pursuant to this Rule.

127

See

Cboe Rule 5.73 for similar provisions, except the Exchange will not incorporate the reference to FLEX SPX as this is a Cboe-specific product.

Proposed Section 12(a)(1)—(5) will set forth the FLEX PIM auction eligibility requirements. Specifically, the Initiating Member may initiate a FLEX PIM auction if all of the following conditions are met:

•

Class.

An Agency Order must in a FLEX Option class the Exchange designates as eligible for FLEX PIM auctions.

•

FLEX Option Series.

The Agency Order and Initiating Order must each be a FLEX Order that complies with proposed Section 11(a) in a permissible FLEX Option series that complies with proposed Section 3 above. For a complex FLEX Order, each leg must be in a permissible FLEX option series that complies with proposed Section 3 above.

128

See

Cboe Rule 5.73(a)(2) for similar provisions, except the Exchange will add a similar stipulation for each leg of a complex FLEX Order for clarity.

•

Marking.

The Initiating Member must mark an Agency Order for FLEX PIM auction processing.

•

Size.

There will be no minimum size for Agency Orders. The Initiating Order must be for the same size as the Agency Order.

•

Minimum Increment.

The price of the Agency Order and Initiating Order for simple FLEX Orders must be in an increment the Exchange determines on a class basis (which may not be smaller than the amounts set forth in Section 5 above). If the Agency Order and Initiating Order are complex orders, the price must be a net price for the complex strategy.

129

While the Exchange will align to Cboe's minimum increment requirements (

i.e.,

$0.01) for the individual options legs of a complex FLEX Order entered into a FLEX PIM, the Exchange also proposes to align the minimum increment requirements for stock-tied FLEX complex strategies with the existing requirements for stock-tied non-FLEX complex strategies as set forth in Options 3, Section 14(c)(1). As such, proposed Options 3A, Section 12(a)(5) will further provide that the prices of Complex Options Strategies (as defined in Options 3, Section 14) may be expressed in one cent ($0.01) increments, and the options leg of Complex Options Strategies may be executed in no smaller than one cent ($0.01) increments, regardless of the minimum increments otherwise applicable to the individual options legs of the order. Prices of Stock-Option Strategies or Stock-Complex Strategies (each as defined in Options 3, Section 14) may be expressed in any decimal price determined by the Exchange,

130

129

The Exchange notes that unlike Cboe, it will not allow prices to be entered as a percentage value, and therefore will not incorporate the applicable language from Cboe Rule 5.73(a)(5) into proposed Section 12(a)(5). As discussed above, the Exchange will also add existing complex order minimum increment requirements in Options 3, Section 14(c)(1) to align the proposed FLEX functionality with non-FLEX functionality.

130

The prices of the FLEX Stock-Option Strategies and FLEX Stock-Complex Strategies can be expressed to four decimal places, which is identical to how the stock portion of a non-FLEX Stock-Option Strategy and a non-FLEX Stock-Complex Strategy can be priced today. However, the options leg will not be permitted to execute in increments smaller than one cent ($0.01).

See supra

note 101.

•

Time.

An Initiating Member may only submit an Agency Order to a FLEX PIM auction after trading in FLEX Options is open pursuant to proposed Section 8.

The System will reject or cancel both an Agency Order and Initiating Order submitted to a FLEX PIM auction that do not meet the conditions in proposed paragraph (a) as described above. The proposed FLEX PIM eligibility requirements in proposed Section 12(a) are substantially similar to Cboe's FLEX AIM eligibility requirements in Cboe Rule 5.73(a), except with respect to the language related to the percentage value, as noted above.

Pursuant to proposed Section 12(b), the Initiating Order must stop the entire Agency Order at a specified price. If the Agency Order and Initiating Order are Complex Orders, the price must be a net price for the complex strategy.

131

In particular, the Initiating Member must specify either of the below; otherwise, the System will reject or cancel both an Agency Order and Initiating Order submitted to a FLEX PIM auction that do not meet the conditions in this proposed paragraph (b).

131

See

Cboe Rule 5.73(b) for similar provisions, except the Exchange will not allow prices to be entered as a percentage value, and therefore will not incorporate the applicable language from Cboe's rule into proposed Section 12(b).

• Pursuant to proposed subparagraph (b)(1), a single price at which it seeks to execute the Agency Order against the Initiating Order (a “single-price submission”), including whether it elects to have less than its guaranteed allocation (as described in proposed Section 12(e)(4) below). This is similar to Cboe Rule 5.73(b)(1), except the Exchange is not proposing to allow Initiating Members to elect for the Initiating Order to have last priority to trade against the Agency Order, and will instead allow them to elect less than their guaranteed allocation.

132

As further discussed below, the proposed guaranteed allocation process will be based on the guaranteed allocation process available in non-FLEX PIM auctions, and therefore the proposed rule change will provide further consistency across the Exchange's auction mechanism processes.

133

132

The Exchange will allow the Initiating Member to customize their guaranteed allocation percentage of the Initiating Order anywhere from 0% up to 50% of the Agency Order (if there is a response(s) from

one

other Member at the same price) or up to 40% of the Agency Order (if there are responses from

two or more

Members at the same price). For example, an Agency Order is entered into FLEX PIM for 100 contracts. If the Initiating Member only wants to have a guaranteed allocation of 10% on the Initiating Order that was entered with the Agency Order, the Initiating Member can stipulate 10% on the Initiating Order. If there are 4 FLEX PIM responses for a total of 200 contracts at the end of the auction, then the Initiating Member will only get 10 contracts allocated on its Initiating Order (

i.e.,

the guaranteed 10% of 100 contracts). Cboe's rule does not allow for the Initiating Member's guaranteed allocation percentages to be customized.

See infra

note 158 for further discussion on the 50%/40% allocation percentages.

133

See infra

note 158 for further discussion on the 50%/40% allocation percentages.

• Pursuant to subparagraph (b)(2), an initial stop price and instruction to automatically match the price and size of all FLEX PIM responses (“auto-match”) at each price, up to a designated limit price, better than the price at which the balance of the Agency Order can be fully executed (the “final auction price”). This is materially identical to Cboe Rule 5.73(b)(2).

Proposed Section 12(c) will govern the FLEX PIM auction process. Specifically, upon receipt of an Agency

Order that meets the conditions in paragraphs (a) and (b) as described above, the FLEX PIM auction process commences. Proposed subparagraphs (c)(1)(A) and (B) will describe concurrent FLEX PIM auctions for simple Agency Orders and complex Agency Orders, respectively. One or more FLEX PIM auctions in the same FLEX Option series or same complex strategy (as applicable) may occur at the same time.

134

To the extent there is more than one FLEX PIM auction in a FLEX Option series or complex strategy (as applicable) underway at the same time, the FLEX PIM auctions will conclude sequentially based on the times at which the FLEX PIM auction periods end. At the time each FLEX PIM auction concludes, the System allocates the Agency Order pursuant to proposed paragraph (e) as described below, and takes into account all FLEX PIM responses received during the FLEX PIM auction period. The concurrent FLEX PIM auction feature in proposed Section 12(c)(1)(A) and (B) is materially identical to Cboe Rule 5.73(c)(1)(A) and (B), and is also consistent with the concurrent auction feature proposed above for FLEX Auctions. Similar to FLEX Auctions as proposed above, if a Member attempts to initiate a FLEX PIM Auction in a FLEX Option series while another auction in that series in ongoing, the Exchange believes it will provide that second FLEX Order with an opportunity for execution in a timely manner by initiating another FLEX PIM Auction, rather than requiring the Member to wait for the first auction to conclude. The second Member may not be able to submit a response to trade in the ongoing FLEX PIM Auction because the terms may not be consistent with that Member's order (for example, there may not be sufficient size, and the Member may only receive a share of the auctioned order depending on other responses). Therefore, the Exchange believes that providing this functionality for FLEX PIM may provide additional opportunities for execution of FLEX Orders by encouraging Members to use FLEX PIM.

134

Further, for complex Agency Orders, PIM auctions in different complex strategies may be ongoing at any given time, even if the complex strategies have overlapping components. A FLEX PIM auction in a complex strategy may be ongoing at the same time as a FLEX PIM auction in any component of the complex strategy.

See

proposed subparagraph (c)(1)(B)(i) of Options 3A, Section 12.

Pursuant to proposed Section 12(c)(2), the System initiates the FLEX PIM auction process by sending a FLEX PIM auction notification message detailing the side, size, auction ID, the length of the FLEX PIM auction period, and FLEX Option series or complex strategy, as applicable, of the Agency Order to all Members that elect to receive FLEX PIM auction notification messages. The Exchange may also determine to include the stop price in FLEX PIM auction notification messages, which will apply to all FLEX PIM auctions. Similar to all other auction notifications, FLEX PIM auction notification messages will not be disseminated to OPRA.

135

See

Cboe Rule 5.73(c)(2) for substantially similar provisions except the Exchange will not incorporate the reference to SPX as it does not list this symbol.

Proposed Section 12(c)(3) will describe the “FLEX PIM Auction period,” and is based on Cboe Rule 5.73(c)(3). The FLEX PIM Auction period will be defined as a period of time that must be designated by the Initiating Member, which may be no less than three seconds and no more than five minutes. Similar to the exposure interval for electronic FLEX Auctions in Section 11(b) discussed above, the Initiating Member will be required to identify a length of time within the specified parameters for FLEX PIM as there will be no default for the FLEX PIM Auction period. Otherwise, their FLEX Order will be rejected by the System. Further, if the designated length of the FLEX PIM Auction period exceeds the market close, then the auction will end at the market close with an execution, if an execution is permitted by this Section 12. Cboe's rule does not specify whether an execution (if permitted) would occur if the designated length exceeds the market close. However, the Exchange's non-FLEX auctions currently allow executions (as permitted by their respective rules) to occur in such scenarios, so the Exchange proposes to be consistent with current System functionality in this regard.

136

In doing so, the Exchange's proposal will promote executions in FLEX PIM (instead of cancelling the FLEX Order) and also prevent executions from occurring after the market close.

136

While this behavior is not explicitly stated in the current Rules, the Exchange's proposal will be consistent with current non-FLEX auction behavior, including current PIM and SOM behavior.

Proposed Section 12(c)(4) will provide that an Initiating Member may not modify or cancel an Agency Order or Initiating Order after submission to a FLEX PIM auction, except to improve the price of the Initiating Order. This will be similar to Cboe Rule 5.73(c)(4) except unlike Cboe, the Exchange will allow a limited exception by allowing Initiating Members to improve the price of their Initiating Orders. The Exchange notes that this will align to current non-FLEX PIM behavior, which allows entering Members to modify their Counter-Side Orders

137

upon entry into the PIM by improving upon the initial price of the Counter-Side Order.

138

Similar to allowing the initiating Member of a non-FLEX PIM to improve the initial price of its Counter-Side Order, the Exchange believes that it is appropriate to allow the Initiating Member of the FLEX PIM to improve the price of its Initiating Order (

i.e.,

contra-side to the Agency Order) because it would also improve the stop price of the Agency Order that came in together with the Initiating Order.

139

137

Counter-Side Orders (

i.e.,

contra-side to the Agency Order) for PIM are functionally equivalent to Initiating Orders (

i.e.,

contra-side order to the Agency Order) for FLEX PIM.

See

Options 3, Section 13(b) for a description of Counter-Side Orders.

138

See Options 3, Section 13(b)(5) (providing that the Crossing Transaction may not be canceled or modified, but the price of the Counter-Side Order may be improved during the exposure period).

139

As proposed, the Initiating Member enters a paired FLEX Order into FLEX PIM consisting of an Agency Order and an Initiating Order (which is the contra-side of the Agency Order). This is identical to how standard non-FLEX PIM works today in that the Initiating Member enters a paired order into standard PIM consisting of an Agency Order and a Counter-Side Order (

i.e.,

the PIM Agency Order's contra-side, and the functional equivalent to an Initiating Order on FLEX PIM).

Proposed Section 12(c)(5) will govern the requirements for FLEX PIM responses. Specifically:

• Any Member other than the Initiating Member (the System rejects a response with the same badge/mnemonic as the Initiating Order) may submit responses to a FLEX PIM auction that are properly marked specifying price, size, side, and the auction ID for the FLEX PIM auction to which the Member is submitting the response. A FLEX PIM response may only participate in the FLEX PIM auction with the auction ID specified in the response.

140

See

proposed Options 3A, Section 12(c)(5), which is based on Cboe Rule 5.73(c)(5).

• The minimum price increment for FLEX PIM responses is the same as the one the Exchange determines for a class pursuant to proposed Section 12(a)(5) above. A response to a FLEX PIM auction of a complex Agency Order must have a net price. The System will reject a FLEX PIM response that is not in the applicable minimum increment.

141

See

proposed Options 3A, Section 12(c)(5)(A), which is based on Cboe Rule 5.73(c)(5)(A) except the Exchange will not allow prices to be expressed as a percentage value. Further, the Exchange will not incorporate the Cboe rule portions on Index Combo Orders as the Exchange does not offer this functionality.

• A Member using the same badge/mnemonic may only submit a single

FLEX PIM response per auction ID for a given auction. If an additional FLEX PIM response is submitted for the same auction ID from the same badge/mnemonic, then that FLEX PIM response will automatically replace the previous FLEX PIM response.

142

See

proposed Options 3A, Section 12(c)(5)(B), which will be different from Cboe Rule 5.73(c)(5)(B) because the Exchange will not allow Members to submit multiple FLEX PIM responses using the same badge/mnemonic, and will not aggregate all of the Member's FLEX PIM responses. While the rules are currently silent in this regard, this will align to current non-FLEX auction behavior, including PIM auction behavior.

• The System will cap the size of a FLEX PIM response at the size of the Agency Order (

i.e.,

the System will ignore size in excess of the size of the Agency Order when processing the FLEX PIM auction).

143

See

proposed Options 3A, Section 12(c)(5)(C), which is based on Cboe Rule 5.73(c)(5)(C) except the Exchange will not allow Members to submit multiple FLEX PIM responses using the same badge/mnemonic, and will not aggregate all of the Member's FLEX PIM responses. As noted above, this will align to current non-FLEX auction functionality, including PIM auction functionality in Options 3, Section 13.

• FLEX PIM responses must be on the opposite side of the market as the Agency Order. The System rejects a FLEX PIM response on the same side of the market as the Agency Order.

144

See

proposed Options 3A, Section 12(c)(5)(D), which is materially identical to Cboe Rule 5.73(c)(5)(D).

• FLEX PIM responses will not be visible to PIM auction participants or disseminated to OPRA.

145

See

proposed Options 3A, Section 12(c)(5)(E), which is materially identical to Cboe Rule 5.73(c)(5)(E).

• A Member may modify or cancel its FLEX PIM responses during the FLEX PIM auction.

146

See

proposed Options 3A, Section 12(c)(5)(F), which is materially identical to Cboe Rule 5.73(c)(5)(F).

Pursuant to proposed Section 12(d), a FLEX PIM auction concludes at the earliest to occur of the following times: (1) the end of the FLEX PIM auction period; and (2) any time the Exchange halts trading in the affected underlying, provided, however, that in such instance the FLEX PIM auction concludes without execution.

147

See

Cboe Rule 5.73(d) for similar provisions, except the Exchange will make a minor clarification that this rule applies when the Exchange halts trading in the affected

underlying

(and not series, which is what Cboe currently has in its rule).

Proposed Section 12(e) will govern how executions will occur in FLEX PIM. In particular, at the end of the FLEX PIM auction, the System allocates the Initiating Order or FLEX PIM responses against the Agency Order at the best price(s), to the price at which the balance of the Agency Order can be fully executed (the “final auction price”), as follows. For purposes of ranking the Initiating Order and FLEX PIM responses when determining how to allocate the Agency Order against the Initiating Order and those responses, the term “price” refers to the dollar and decimal amount of the order or response bid or offer.

148

Proposed subparagraphs (e)(1)-(4) details the FLEX PIM allocation methodology for the following scenarios:

148

See

Cboe Rule 5.73(e) for similar provisions except the Exchange will not allow prices to be expressed as a percentage value.

•

No Price Improvement:

If the FLEX PIM auction results in no price improvement, the System executes the Agency Order at the stop price in the following order:

• Priority Customer responses (in time priority);

149

See

proposed Section 12(e)(1)(A), which is materially identical to Cboe Rule 5.73(e)(1)(A).

• The Initiating Order for the greater of (1) one contract or (2) up to 50% of the Agency Order if there is a response(s) from one other Member at the same price or 40% of the Agency Order if there are responses from two or more other Members at the same price (which percentages are based on the original size of the Agency Order).

150

Unless there are remaining contracts after including all PIM responses, under no circumstances does the Initiating Member receive an allocation percentage at the final auction price of more than 50% of the initial Agency Order in the event there is a response(s) from one other Member or 40% of the initial Agency Order in the event there are responses from two or more other Members, except when rounding up. The Exchange is specifying two limited scenarios in this Rule where the Initiating Member may receive an allocation percentage greater than its guaranteed allocation percentage, which is either when there are remaining contracts after including all PIM responses or when rounding up.

151

As an example of the first scenario, assume an Initiating Member submitted a FLEX Order for 20 contracts into FLEX PIM and there are 2 PIM responses (one for 3 contracts and one for 4 contracts). After the 7 PIM responses are allocated, the Initiating Member would then receive the remaining 13 contracts (which is more than their 40% allocation percentage) because there are remaining contracts after all PIM responses are included.

150

See

proposed Section 12(e)(1)(B)(ii), which is based on Cboe Rule 5.73(e)(1)(B)(ii) except the percentages will be based on the original size of the Agency Order, instead of the number of contracts remaining after execution against Priority Customer responses like Cboe. This will align to current PIM functionality.

See

Options 3, Section 13(d)(3).

See infra

note 158 for further discussion on the 50%/40% allocation percentages.

151

See

proposed Section 12(e)(1)(B), which is based on Cboe Rule 5.73(e)(1)(B) except with respect to the two limited scenarios discussed above. This behavior relating to the remaining contracts scenario and rounding up scenario will align to current PIM functionality. While the Exchange's rules are silent on the first scenario, the rounding up scenario is specified in Options 3, Section 13(d)(7).

• All other FLEX PIM responses, allocated on a Size Pro-Rata basis (as defined in Options 3, Section 10(c));

152

and

152

See

proposed Section 12(e)(1)(C), which is materially identical to Cboe Rule 5.73(e)(1)(C). The Exchange notes that Size Pro-Rata (as defined in Options 3, Section 10(c)) is similar to pro-rata as referenced in the Cboe rule (and as defined in Cboe Rule 5.32(a)(1)(B)).

• The Initiating Order to the extent there are any remaining contracts.

153

See

proposed Section 12(e)(1)(D), which is materially identical to Cboe Rule 5.73(e)(1)(D).

•

Price Improvement With Single-Price Submission:

If the FLEX PIM auction results in price improvement for the Agency Order and the Initiating Member selected a single-price submission, at each price better than the final auction price, the System executes the Agency Order in the following order:

• Priority Customer responses (in time priority);

154

See

proposed Section 12(e)(2)(A), which is materially identical to Cboe Rule 5.73(e)(2)(A).

• Other FLEX PIM responses (in time priority) at prices better than the final auction price; and

• All other FLEX PIM responses at the final auction price, allocated on a Size Pro-Rata basis (as defined in Options 3, Section 10(c)).

155

See

proposed Section 12(e)(2)(B), which is based on Cboe Rule 5.73(e)(2)(B), except the Exchange will specify that other FLEX PIM responses at prices better than the final auction price will be allocated in time priority and all other FLEX PIM responses at the final auction price will be allocated on a Size Pro-Rata Basis. While the current rules are silent in this regard, this behavior follows current System behavior for its PIM functionality.

For example, assume a FLEX PIM Agency Order is sent for 100 contracts with a price of $1.00 and the Initiating Member selected a single-price submission. There are two PIM responses for 5 contracts each at $0.98, two PIM responses for 20 contracts each at $0.99, and two PIM responses for 40 contracts each at $1.00. The PIM responses at $0.98 and $0.99 will be executed in their entirety. The PIM responses at $1.00 (final auction price) will be executed on a Size Pro-Rata basis. At the final auction price, the System executes any remaining contracts from the Agency Order at that

price in the order set forth in proposed Section 12(e)(1), as described above.

156

See

proposed Section 12(e)(2), which is materially identical to Cboe Rule 5.73(e)(2).

•

Price Improvement With Auto-Match:

If the FLEX PIM auction results in price improvement for the Agency Order and the Initiating Member selected auto-match, at each price better than the final auction price up to the designated limit price, the System executes the Agency Order against the Initiating Order for the number of contracts equal to the aggregate size of all FLEX PIM responses and then executes the Agency Order against those responses in the order set forth in proposed subparagraph (e)(2) described above. At the final auction price, the System executes contracts at that price in the order set forth in proposed subparagraph (e)(1) described above.

157

See

proposed Section 12(e)(3), which is materially identical to Cboe Rule 5.73(e)(3).

•

Guaranteed Allocation:

If the Initiating Member selects a single-price submission, it may elect for the Initiating Order to have less than their guaranteed allocation (50% if there is a response(s) from one other Member or 40% if there are responses from two or more Members) to trade against the Agency Order. The Initiating Member may select a lesser percentage than their guaranteed allocation. If the Initiating Member elects 0%, then notwithstanding subparagraphs (e)(1) and (2), the System only executes the Initiating Order against any remaining Agency Order contracts at the stop price after the Agency Order is allocated to all FLEX PIM responses at all prices equal to or better than the stop price. Guaranteed allocation information is not available to other market participants and may not be modified after it is submitted.

158

See

proposed Section 12(e)(4), which is based on Cboe Rule 5.73(e)(4) except the Exchange will replace Cboe's last priority feature with a guaranteed allocation feature similar to current PIM functionality that allows Members to request a lower percentage than their guaranteed allocation.

See

Options 3, Section 13(d)(3). As such, the difference between Cboe's rule and ISE's rule will be that ISE Members will be able to customize their guaranteed allocation percentages for FLEX PIM (which will follow the non-FLEX PIM process) while Cboe's rules do not seem to allow this for FLEX AIM. The Exchange notes that the proposed guaranteed allocation percentages of 50% (if there is a response(s) from one other Member) and 40% (if there are responses from two or more Members) for FLEX PIM will differ from the current guaranteed allocation percentage of 40% for standard PIM. As such, the Exchange is aligning to Cboe's allocation percentages. The Exchange also notes that its affiliates, Nasdaq BX, Inc. (“BX”) and Nasdaq PHLX LLC (“Phlx”), have consistent guaranteed allocation percentages for their standard non-FLEX price improvement auctions, BX PRISM and Phlx PIXL.

See

BX Options 3, Section 13(ii)(A)(1) and Phlx Options 3, Section 13(b)(5)(B).

Pursuant to proposed Section 12(e)(5), the System cancels any unexecuted FLEX PIM responses (or unexecuted portions) at the conclusion of the FLEX PIM auction.

159

See

Cboe Rule 5.73(e)(5) for substantially similar provisions.

Lastly, the Exchange proposes a number of policies applicable to FLEX PIM as Supplementary Materials to Options 3A, Section 12. Specifically, proposed Supplementary Material .01 will provide that a Member may only use a FLEX PIM auction where there is a genuine intention to execute a bona fide transaction.

160

Proposed Supplementary Material .02 will provide that it will be deemed conduct inconsistent with just and equitable principles of trade and a violation of Options 9, Section 1

161

to engage in a pattern of conduct where the Initiating Member breaks up an Agency Order into separate orders for the purpose of gaining a higher allocation percentage than the Initiating Member would have otherwise received in accordance with the allocation procedures contained in proposed paragraph (e) above.

162

Lastly, proposed Supplementary Material .03 will provide that if an allocation would result in less than one contract, then one contract will be allocated.

163

This aligns to how the Exchange currently allocates contracts in PIM.

164

160

See

Cboe Rule 5.73, Interpretations and Policies .01 for materially identical provisions.

161

Options 9, Section 1 provides that no Member shall engage in acts or practices inconsistent with just and equitable principles of trade. Persons associated with Members shall have the same duties and obligations as Members under the Rules of Options 9.

162

See

Cboe Rule 5.73, Interpretations and Policies .02 for materially identical provisions.

163

The Exchange notes that it is not proposing to add the provision from Cboe Rule 5.73, Interpretations and Policies .03 that states: “A FLEX Official may nullify a transaction following a FLEX AIM Auction pursuant to Rule 5.75(b).” Because the FLEX Official is a floor concept and the Exchange does not operate a trading floor, the Exchange will not incorporate this concept into its proposed FLEX rules. Instead, the Exchange will System-enforce this provision by rejecting a FLEX PIM auction that does not comply with the provisions in proposed Options 3A, Section 12.

164

See

Supplementary Material .10 to Options 3, Section 13.

N. FLEX SOM (Section 13)

The Exchange proposes to establish SOM auction functionality for FLEX Options in Options 3A, Section 13. The proposed FLEX SOM auction will be substantially similar to Cboe's FLEX SAM in Cboe Rule 5.74, except for certain intended differences to align with the Exchange's current System functionality for non-FLEX Options, as further described below. Pursuant to proposed Section 13, a Member (the “Initiating Member”) may electronically submit for execution an order (which may be a simple or complex order) it represents as agent (“Agency Order”) against a solicited order (“Solicited Order”) if it submits the Agency Order for electronic execution into a FLEX SOM auction pursuant to this Rule.

165

See

Cboe Rule 5.74 for similar provisions, except the Exchange will not add Cboe's language that the Solicited Order cannot have a Capacity F (

i.e.,

Firm capacity) for the same executing firm ID (“EFID”) as the Agency Order for the foregoing reasons. Facilitated orders cannot be entered into FLEX SOM (just like they cannot be entered into standard SOM today). Since an order with the capacity of Firm can be valid for a solicitation order, the Exchange will not System enforce the rejection of Firm capacity orders to avoid the rejection of contra-side orders that are entered with a Firm capacity and are, in fact, solicitations at the outset. Instead, it will monitor for compliance with the requirement that the contra-side order be a solicitation rather than a facilitation through surveillance, as it does today for non-FLEX SOM. The applicable rule for the foregoing requirement will be set forth in Supplementary Material .02 to Options 3A, Section 13.

Proposed Section 13(a)(1)-(6) will set forth the FLEX SOM auction eligibility requirements, and will be substantially similar to Cboe Rule 5.74(a)(1)-(6) except as noted below. Specifically, the Initiating Member may initiate a FLEX SOM auction if all of the following conditions are met:

• Class. An Agency Order must in a FLEX Option class the Exchange designates as eligible for FLEX SOM auctions.

• FLEX Option Series. The Agency Order and Solicited Order must each be a FLEX Order that complies with proposed Section 11(a) in a permissible FLEX Option series that complies with proposed Section 3 above. For a complex FLEX Order, each leg must be in a permissible FLEX option series that complies with Section 3 above.

166

See

Cboe Rule 5.74(a)(2) for similar provisions, except the Exchange will add a similar stipulation for each leg of a complex FLEX Order for clarity.

• Marking. The Initiating Member must mark an Agency Order for FLEX SOM auction processing.

• Size. The Agency Order must be for at least the minimum size designated by the Exchange (which may not be less than 500 standard option contracts). For complex FLEX Orders, this minimum size requirement will apply to each leg. The Solicited Order must be for the same size as the Agency Order. The System handles each of the Agency Order and the Solicited Order as all-or-none.

167

See

Cboe Rule 5.74(a)(4) for similar provisions except unlike Cboe, the Exchange will not allow the Solicited Order to be comprised of multiple solicited orders in FLEX SOM to be consistent with current non-FLEX SOM functionality in Options 3,

Section 11(d). In addition, the Exchange will not incorporate Cboe's provisions relating to mini options or Micro FLEX Index Options into proposed Section 13(a)(4) as the Exchange does not list these products today. Further, the Exchange is adding a minor clarification that the minimum size requirement will apply to each leg of a complex FLEX Order.

• Minimum Increment. The price of the Agency Order and Solicited Order for simple FLEX Orders must be in an increment the Exchange determines on a class basis (which may not be smaller than the amounts set forth in Section 5 above). If the Agency Order and Solicited Order are complex orders, the price must be a net price for the complex strategy.

168

While the Exchange will align to Cboe's minimum increment requirements (

i.e.,

$0.01) for the individual options legs of a complex FLEX Order entered into a FLEX SOM, the Exchange also proposes to align the minimum increment requirements for stock-tied FLEX complex strategies with the existing requirements for stock-tied non-FLEX complex strategies as set forth in Options 3, Section 14(c)(1). As such, proposed Options 3A, Section 12(a)(5) will further provide that the prices of Complex Options Strategies (as defined in Options 3, Section 14) may be expressed in one cent ($0.01) increments, and the options leg of Complex Options Strategies may be executed in no smaller than one cent ($0.01) increments, regardless of the minimum increments otherwise applicable to the individual options legs of the order. Prices of Stock-Option Strategies or Stock-Complex Strategies (each as defined in Options 3, Section 14) may be expressed in any decimal price determined by the Exchange,

169

168

The Exchange notes that unlike Cboe, it will not allow prices to be entered as a percentage value, and therefore will not incorporate the applicable language from Cboe Rule 5.74(a)(5) into proposed Section 13(a)(5). As discussed above, the Exchange will also incorporate existing minimum increment requirements for non-FLEX complex orders into proposed Section 13(a)(5) to align the proposed FLEX functionality with non-FLEX functionality.

169

The prices for FLEX Stock-Option Strategies and FLEX Stock-Complex Strategies can be expressed to four decimal places, which is identical to how the stock portion of a non-FLEX Stock-Option Strategy and a non-FLEX Stock-Complex Strategy can be priced today.

See supra

note 101.

• An Initiating Member may only submit an Agency Order to a FLEX SOM auction after trading in FLEX Options is open pursuant to proposed Section 8.

The System will reject or cancel both an Agency Order and Solicited Order submitted to a FLEX SOM auction that do not meet the conditions in proposed paragraph (a) as described above.

Pursuant to proposed Section 13(b), the Solicited Order must stop the entire Agency Order at a specified price. If the Agency Order and Solicited Order are complex orders, the price must be a net price for the complex strategy. The Initiating Member must specify a single price at which it seeks to execute the Agency Order against the Solicited Order. Otherwise, the System will reject or cancel both an Agency Order and Solicited Order submitted to a FLEX SOM auction that do not meet this condition.

170

See

Cboe Rule 5.74(b) for similar provisions, except the Exchange will not allow prices to be entered as a percentage value, and therefore will not incorporate the applicable language from Cboe's rule into proposed Section 13(b).

Proposed Section 13(c) will govern the FLEX SOM auction process. Specifically, upon receipt of an Agency Order that meets the conditions in paragraphs (a) and (b) as described above, the FLEX SOM auction process commences. Proposed subparagraphs (c)(1)(A) and (B) will describe concurrent FLEX SOM auctions for simple Agency Orders and complex Agency Orders, respectively, and will be materially identical to Cboe Rule 5.74(c)(1)(A) and (B).

One or more FLEX SOM auctions in the same FLEX Option series or same complex strategy (as applicable) may occur at the same time.

171

To the extent there is more than one FLEX SOM auction in a FLEX Option series or complex strategy (as applicable) underway at the same time, the FLEX SOM auctions will conclude sequentially based on the times at which the FLEX SOM auction periods end. At the time each FLEX SOM auction concludes, the System allocates the Agency Order pursuant to proposed paragraph (e) as described below, and takes into account all FLEX SOM responses received during the FLEX SOM auction period. As noted above, the proposed concurrent FLEX SOM auction feature is consistent with Cboe's concurrent FLEX SAM auctions feature in Cboe Rule 5.74(c)(1), and is also consistent with the concurrent auction feature proposed above for FLEX Auctions and FLEX PIM. For the same reasons stated above for FLEX Auctions and FLEX PIM, the Exchange believes that providing this concurrent auction functionality for FLEX SOM may provide additional opportunities for execution of FLEX Orders by encouraging Members to use FLEX SOM.

171

Further, for complex Agency Orders, SOM auctions in different complex strategies may be ongoing at any given time, even if the complex strategies have overlapping components. A FLEX SOM auction in a complex strategy may be ongoing at the same time as a FLEX SOM auction in any component of the complex strategy.

See

proposed subparagraph (c)(1)(B)(i) of Options 3A, Section 13.

Pursuant to proposed Section 13(c)(2), the System initiates the FLEX SOM auction process by sending a FLEX SOM auction notification message detailing the side, size, price, capacity, auction ID, the length of the FLEX SOM auction period, and FLEX Option series or complex strategy, as applicable, of the Agency Order to all Members that elect to receive FLEX SOM auction notification messages. Similar to all other auction notifications, FLEX SOM auction notification messages will not be disseminated to OPRA. These provisions are materially identical to Cboe Rule 5.74(c)(2).

Proposed Section 13(c)(3) will describe the “FLEX SOM Auction period,” and is based on Cboe Rule 5.74(c)(3). The FLEX SOM Auction period will be defined as a period of time that must be designated by the Initiating Member, which may be no less than three seconds and no more than five minutes. Similar to the exposure interval for electronic FLEX Auctions in Section 11(b) and the FLEX PIM Auction period in Section 12(c)(3) as discussed above, the Initiating Member will be required to identify a length of time within the specified parameters for FLEX SOM as there will be no default for the FLEX SOM Auction period. Otherwise, their FLEX Order will be rejected by the System. Further, if the designated length of the FLEX SOM Auction period exceeds the market close, then the auction will end at the market close with an execution, if an execution is permitted by this Section 13. Cboe's rule does not specify whether an execution (if permitted) would occur if the designated length exceeds the market close. However, the Exchange's non-FLEX auctions currently allow executions (as permitted by their respective rules) to occur in such scenarios, so the Exchange proposes to be consistent with current

System functionality in this regard.

172

In doing so, the Exchange's proposal will promote executions in FLEX SOM (instead of cancelling the FLEX Order) while also preventing executions from occurring after the market close.

172

While this behavior is not explicitly stated in the current Rules, the Exchange's proposal will be consistent with current non-FLEX auction behavior, including current PIM and SOM behavior.

Proposed Section 13(c)(4) will provide that an Initiating Member may not modify an Agency Order or Solicited Order after submission to a FLEX SOM auction. This will be similar to Cboe Rule 5.74(c)(4) except unlike Cboe, the Exchange will allow Initiating Members to cancel their Agency Orders and Solicited Orders upon submission into a FLEX SOM, which will align with current SOM functionality.

173

This feature is not explicitly stated in the current SOM rules in Options 3, Section 11(d), but it is consistent with current SOM functionality.

Proposed Section 13(c)(5) will govern the requirements for FLEX SOM responses. Specifically:

• Any Member other than the Initiating Member (the response cannot have the same badge/mnemonic as the Agency Order) may submit responses to a FLEX SOM auction that are properly marked specifying size, side, price, and the auction ID for the FLEX SOM auction to which the Member is submitting the response. A FLEX SOM response may only participate in the FLEX SOM auction with the auction ID specified in the response.

174

See

proposed Options 3A, Section 13(c)(5), which is based on Cboe Rule 5.74(c)(5).

• The minimum price increment for FLEX SOM responses is the same as the one the Exchange determines for a class pursuant to proposed Section 12(a)(5) above. A response to a FLEX SOM auction of a complex Agency Order must have a net price. The System will reject a FLEX SOM response that is not in the applicable minimum increment.

175

See

proposed Options 3A, Section 13(c)(5)(A), which is based on Cboe Rule 5.74(c)(5)(A) except the Exchange will not allow prices to be expressed as a percentage value.

• A Member using the same badge/mnemonic may only submit a single FLEX SOM response per auction ID for a given auction. If an additional SOM response is submitted for the same auction ID from the same badge/mnemonic, then that FLEX SOM response will automatically replace the previous FLEX SOM response.

176

See

proposed Options 3A, Section 13(c)(5)(B), which will be different from Cboe Rule 5.74(c)(5)(B) because the Exchange will not allow Members to submit multiple FLEX SOM responses using the same badge/mnemonic, and will not aggregate all of the Member's FLEX SOM responses. While the Exchange's standard non-FLEX rules are currently silent in this regard, the Exchange is making these concepts clear in the proposed FLEX language. Ultimately the Exchange's proposed FLEX SOM functionality in this regard will align to current non-FLEX auction functionality, including SOM auctions in Options 3, Section 11(d).

• The System will cap the size of a FLEX SOM response at the size of the Agency Order (

i.e.,

the System will ignore size in excess of the size of the Agency Order when processing the FLEX SOM auction).

177

See

proposed Options 3A, Section 13(c)(5)(C), which is based on Cboe Rule 5.74(c)(5)(C) except the Exchange will not allow Members to submit multiple FLEX SOM responses using the same badge/mnemonic, and will not aggregate all of the Member's FLEX SOM responses. As noted above, this will align to current non-FLEX auction functionality, including SOM auctions in Options 3, Section 11(d).

• FLEX SOM responses must be on the opposite side of the market as the Agency Order. The System rejects a FLEX SOM response on the same side of the market as the Agency Order.

178

See

proposed Options 3A, Section 13(c)(5)(D), which is materially identical to Cboe Rule 5.74(c)(5)(D).

• FLEX SOM responses will not be visible to FLEX SOM auction participants or disseminated to OPRA.

179

See

proposed Options 3A, Section 13(c)(5)(E), which is materially identical to Cboe Rule 5.74(c)(5)(E).

• A Member may modify or cancel its FLEX SOM responses during a FLEX SOM auction.

180

See

proposed Options 3A, Section 13(c)(5)(F), which is materially identical to Cboe Rule 5.74(c)(5)(F).

Pursuant to proposed Section 13(d), a FLEX SOM auction concludes at the earliest to occur of the following times: (1) the end of the FLEX SOM auction period; and (2) any time the Exchange halts trading in the affected underlying, provided, however, that in such instance the FLEX SOM auction concludes without execution.

181

See

Cboe Rule 5.74(d) for similar provisions, except the Exchange will make a minor clarification that this rule applies when the Exchange halts trading in the affected

underlying

(and not series, which is what Cboe currently has in its rule).

Proposed Section 13(e) will govern how executions will occur in FLEX SOM. In particular, at the end of the FLEX SOM auction, the System will execute the Agency Order against the Solicited Order or FLEX SOM responses at the best price(s) as follows. For purposes of ranking the Solicited Order and FLEX SOM responses when determining how to allocate the Agency Order against the Solicited Order and those responses, the term “price” refers to the dollar and decimal amount of the order or response bid or offer.

182

Proposed subparagraphs (e)(1)-(3) detail the FLEX SOM allocation methodology for the following scenarios:

182

See

Cboe Rule 5.74(e) for similar provisions except the Exchange will not allow prices to be expressed as a percentage value.

•

Execution Against Solicited Order:

The System executes the Agency Order against the Solicited Order at the stop price if there are no Priority Customer FLEX SOM responses and the aggregate size of FLEX SOM responses at an improved price(s) is insufficient to satisfy the Agency Order.

183

See

proposed Section 13(e)(1), which is materially identical to Cboe Rule 5.74(e)(1).

•

Execution Against FLEX SOM Responses:

The System executes the Agency Order against FLEX SOM responses if (1) there is a Priority Customer FLEX SOM response and the aggregate size of that response and all other FLEX SOM responses is sufficient to satisfy the Agency Order or (2) the aggregate size of FLEX SOM responses at an improved price(s) is sufficient to satisfy the Agency Order. The Agency Order executes against FLEX SOM responses at each price level. At the price at which the balance of the Agency Order can be fully executed, in the following order:

• Priority Customer FLEX SOM responses (in time priority);

184

and

184

See

proposed Section 13(e)(2)(A), which is materially identical to Cboe Rule 5.74(e)(2)(A).

• All other FLEX SOM responses, allocated on a Size Pro-Rata basis (as defined in Options 3, Section 10(c)).

185

See

proposed Section 13(e)(2)(B), which is materially identical to Cboe Rule 5.74(e)(2)(B). The Exchange notes that Size Pro-Rata (as defined in Options 3, Section 10(c)) is similar to pro-rata as referenced in the Cboe rule (and as defined in Cboe Rule 5.32(a)(1)(B)).

•

No Execution:

The System will cancel the Agency Order and Solicited Order with no execution if there is a Priority Customer FLEX SOM response and the aggregate size of that response and other FLEX SOM responses is insufficient to satisfy the Agency Order.

186

See

proposed Section 13(e)(3), which is materially identical to Cboe Rule 5.74(e)(3).

Pursuant to proposed Section 12(e)(4), the System cancels any unexecuted FLEX SOM responses (or unexecuted portions) at the conclusion of a FLEX SOM auction.

187

See

Cboe Rule 5.74(e)(4) for substantially similar provisions.

Lastly, the Exchange proposes a number of policies applicable to FLEX SOM as Supplementary Materials to Options 3A, Section 13. Specifically, proposed Supplementary Material .01 will provide that prior to entering Agency Orders into a FLEX SOM auction on behalf of customers, Initiating Members must deliver to the customer a written notification informing the customer that its order

may be executed using the FLEX SOM Auction. The written notification must disclose the terms and conditions contained in this Rule and be in a form approved by the Exchange.

188

Proposed Supplementary Material .02 will provide that under this Rule, Initiating Members may enter contra-side orders that are solicited. FLEX SOM provides a facility for Members that locate liquidity for their customer orders. Members may not use the FLEX SOM auction to circumvent Options 3, Section 22(b) limiting principal transactions. This may include, but is not limited to, Members entering contra-side orders that are solicited from (1) affiliated broker-dealers, or (2) broker-dealers with which the Member has an arrangement that allows the Member to realize similar economic benefits from the solicited transaction as it would achieve by executing the customer order in whole or in part as principal. Additionally, any solicited contra-side orders entered by Members to trade against Agency Orders may not be for the account of an Exchange Market Maker that is assigned to the options class.

189

Lastly, proposed Supplementary Material .03 will provide that if an allocation would result in less than one contract, then one contract will be allocated.

190

This aligns to how the Exchange currently allocates contracts in SOM.

191

188

See

Cboe Rule 5.74, Interpretations and Policies .01 for materially identical provisions.

189

See

Cboe Rule 5.74, Interpretations and Policies .02 for similar provisions. The Exchange is also adding a prohibition against solicited contra-side orders being for the account of an Exchange Market Maker assigned to the options class to align with the current prohibition in Supplementary Material .03 to Options 3, Section 11.

190

The Exchange notes that it is not proposing to add the provision from Cboe Rule 5.74, Interpretations and Policies .03 that states: “A FLEX Official may nullify a transaction following a FLEX SAM Auction pursuant to Rule 5.75(b).” Because the FLEX Official is a floor concept and the Exchange does not operate a trading floor, the Exchange will not incorporate this concept into its proposed FLEX rules. Instead, the Exchange will System-enforce this provision by rejecting a FLEX SAM auction that does not comply with the provisions in proposed Options 3A, Section 13.

191

See

Supplementary Material .09 to Options 3, Section 11.

O. Risk Protections (Section 14)

The Exchange proposes in Options 3A, Section 14 to specify which of the Exchange's risk protections apply to FLEX trading. Risk protections are protections in our System to help minimize risk. The risk protections specified in proposed Options 3A, Sections 14(a) and 14(b) are mandatory whereas the risk protections specified in proposed Options 3A, Section 14(c) are optional. Proposed Section 14(a) will provide that the following simple order risk protections (as described in Options 3, Section 15) are available to FLEX Options: Market Wide Risk Protection and Size Limitation.

192

As set forth in Options 3, Section 15(a)(1)(C), Market Wide Risk Protections are mandatory activity-based protections that allow Members to establish limits for order entry and execution rate during a specified period of time. The System maintains separate counts for each of the thresholds specified in the rule over rolling periods of time.

193

Upon triggering the specified limits, the System will either delete all open orders and prevent entry of new orders for the Member, or prevent entry of new orders for the Member. Similar to how Market Wide Risk Protection assists Members in better managing their risk in the standard non-FLEX market on ISE today, the Exchange believes that applying Market Wide Risk Protection to its FLEX market will be beneficial for Members using FLEX trading.

192

Size Limitation for simple orders is a limit on the number of contracts an incoming order may specify. Orders that exceed the maximum number of contracts are rejected. The maximum number of contracts, which shall not be less than 10,000, is established by the Exchange from time-to-time.

See

Options 3, Section 15(a)(2)(B).

193

As set out in Options 3, Section 15(a)(1)(C), the Market Wide Risk Protection will have counting programs that will maintain separate counts, over rolling time periods specified by the Member for each count, of: (1) the total number of orders entered in the regular order book; (2) the total number of orders entered in the complex order book with only options legs; (3) the total number of Stock-Option and Stock-Complex Orders; (4) the total number of contracts traded in regular orders; (5) the total number of contracts traded in Complex Options Orders; and (6) the total number of contracts traded in Stock-Option and Stock-Complex Orders. As applied to FLEX, only items (4) through (6) of the foregoing will apply. Items (1) through (3) will not apply to FLEX because there is no order book for FLEX. The Exchange notes that Options 3, Section 15(a)(1)(C)(5) (

i.e.,

item (5) of the foregoing) presently refers to Stock-Option and Stock Complex Orders, instead of Complex Options Orders. However, ISE will file a clean-up amendment so that subparagraph (5) will refer instead to Complex Options Orders. This clean-up will align ISE's rule to MRX Options 3, Section 15(a)(1)(C).

Proposed Section 14(b) will provide that the following complex order risk protections (as described in Options 3, Section 16) are available to FLEX Options: Strategy Protections (only to FLEX Auctions and FLEX responses in proposed Options 3A, Section 11(b)), Size Limitation,

194

the Price Limit for Complex Order protections as appliable to the stock component (as described in Options 3, Section 16(a)),

195

the Stock-Tied NBBO protections (as described in Options 3, Section 16(d)),

196

and the Stock-Tied Reg SHO protections (as described in Options 3, Section 16(e)).

197

194

Size Limitation for complex orders is a limit on the number of contracts (and shares in the case of a Stock-Option Strategy or Stock-Complex Strategy) any single leg of an incoming Complex Order may specify. Orders that exceed the maximum number of contracts (or shares) are rejected. The maximum number of contracts (or shares), which shall not be less than 10,000 (or 100,000 shares), is established by the Exchange from time-to-time.

See

Options 3, Section 16 (c)(2).

195

The Exchange amended the Price Limits for Complex Order protections in Options 3, Section 16(a) for its standard non-FLEX complex market as part of the technology migration to enhanced Nasdaq functionality discussed above. See supra note 11. See also Securities Exchange Act Release No. 98066 (August 7, 2023), 88 FR 54672 (August 11, 2023) (SR-ISE-2023-13).

196

The Exchange introduced the Stock-Tied NBBO protections in Options 3, Section 16(d) for its standard non-FLEX complex market as part of the technology migration to enhanced Nasdaq functionality discussed above. See supra note 11. See also Securities Exchange Act Release No. 98066 (August 7, 2023), 88 FR 54672 (August 11, 2023) (SR-ISE-2023-13).

197

The Exchange introduced the Stock-Tied Reg SHO protections in Options 3, Section 16(e) for its standard non-FLEX complex market as part of the technology migration to enhanced Nasdaq functionality discussed above. See supra note 11. See also Securities Exchange Act Release No. 98066 (August 7, 2023), 88 FR 54672 (August 11, 2023) (SR-ISE-2023-13).

The Strategy Protections listed in Options 3, Section 16(b) are the Vertical Spread Protection,

198

Calendar Spread Protection,

199

Butterfly Spread Protection,

200

and Box Spread Protection.

201

These Strategy Protections are all aimed at preventing the potential execution of the specified complex strategies (

i.e.,

vertical spread, calendar spread, butterfly spread, and box spread) outside of specified price parameters in order to prevent executions at undesirable prices. Today, Strategy Protections do not apply to

orders and responses submitted into non-FLEX PIM and non-FLEX SOM.

202

The Exchange will align this application to FLEX such that Strategy Protections would only apply to FLEX Auctions and FLEX responses in proposed Section 11(b) as described above, and not to FLEX Orders and responses submitted into FLEX PIM and FLEX SOM.

198

The Vertical Spread Protection will apply to a vertical spread. A vertical spread is an order to buy a call (put) option and to sell another call (put) option in the same security with the same expiration but at a higher (lower) strike price. See Options 3, Section 16(b)(1).

199

The Calendar Spread Protection will apply to a Calendar Spread. A calendar spread is an order to buy a call (put) option with a longer expiration and to sell another call (put) option with a shorter expiration in the same security at the same strike price. See Options 3, Section 16(b)(2).

200

The Butterfly Spread Protection will apply to a butterfly spread. A butterfly spread is a three legged Complex Order with the following: (1) two legs to buy (sell) the same number of calls (puts); (2) one leg to sell (buy) twice the number of calls (puts) with a strike price at mid-point of the two legs to buy (sell); (3) all legs have the same expiration; and (4) each leg strike price is equidistant from the next sequential strike price. See Options 3, Section 16(b)(3).

201

The Box Spread Protection will apply to a box spread. A box spread is a four legged Complex Order with the following: (1) one pair of legs with the same strike price with one leg to buy a call (put) and one leg to sell a put (call); (2) a second pair of legs with a different strike price from the pair described in (1) with one leg to sell a call (put) and one leg to buy a put (call); (3) all legs have the same expiration; and (4) all legs have equal volume. See Options 3, Section 16(b)(4).

202

See Options 3, Section 16(b), which describes the non-applicability of the Strategy Protections to certain auction mechanisms.

See also

Securities Exchange Act Release No. 100743 (August 16, 2024), 89 FR 68014 (August 22, 2024) (SR-ISE-2024-39) (effective but not yet operative). As amended by SR-ISE-2024-39, Options 3, Section 16(b) would provide that the Strategy Protections will not apply when a standard non-FLEX complex order includes at least one p.m.-settled leg and at least one a.m.-settled leg. This would likewise be true for complex FLEX Orders (

i.e.,

the Strategy Protections would not apply when a complex FLEX Order includes at least one p.m.-settled leg and at least one a.m.-settled leg).

As noted above, the Exchange adopted the Price Limit for Complex Order protections in Options 3, Section 16(a),

203

the Stock-Tied NBBO protections in Options 3, Section 16(d),

204

and the Stock-Tied Reg SHO protections in Options 3, Section 16(e)

205

(collectively, the “Stock-Tied Risk Protections”) as part of SR-ISE-2023-13 for its standard non-FLEX complex market. The Exchange is now proposing to apply the Stock-Tied Risk Protections to complex FLEX Orders to the extent the complex FLEX Order has a stock component. The Price Limits for Complex Orders in Options 3, Section 16(a) seek to prevent complex executions from occurring outside of certain price limits that are tied to the NBBO for the options series or for any stock component. Because there will be no book for FLEX trading (and therefore no NBBO for the FLEX Options series), the Exchange will not apply the price limit protection tied to the NBBO for the options series for FLEX trading. To the extent the complex FLEX Order has a stock component, the Exchange will only apply the price limit protection tied to the NBBO for the stock component. The below is an example of how the Exchange will apply the Options 3, Section 16(a) price protection to complex FLEX Orders.

203

Specifically, Options 3, Section 16(a) states that as provided in Options 3, Section 14(d)(2), the legs of a complex strategy may be executed at prices that are inferior to the prices available on other exchanges trading the same options series. Notwithstanding, the System will not permit any leg of a complex strategy to trade through the NBBO for the series or any stock component by a configurable amount calculated as the lesser of (i) an absolute amount not to exceed $0.10, and (ii) a percentage of the NBBO not to exceed 500%, as determined by the Exchange on a class, series or underlying basis. A Member can also include an instruction on a Complex Order that each leg of the Complex Order is to be executed only at a price that is equal to or better than the NBBO for the options series or any stock component, as applicable (“Do-Not-Trade-Through” or “DNTT”). As discussed later in this filing, the NBBO price limit for the option series will not apply to complex FLEX orders; however, the NBBO price limit for the stock component will apply.

204

Specifically, Options 3, Section 16(d) provides that for Complex Orders in Stock-Option Strategies and Stock-Complex Strategies, the Exchange shall electronically communicate the underlying security component of a Complex Order to Nasdaq Execution Services, LLC (“NES”), its designated broker dealer, for immediate execution. Such execution and reporting will not occur on the Exchange and will be handled by NES pursuant to applicable rules regarding equity trading. NES will ensure that the execution price is within the high-low range for the day in that stock at the time the Complex Order is processed and within a certain price from the current market pursuant to Options 3, Section 16(a). If the stock price is not within these parameters, the Complex Order is not executable and the Exchange will hold the Complex Order on the Order Book, if consistent with Member instructions. This risk protection will apply wholesale to complex FLEX Orders with a stock component.

205

Specifically, Options 3, Section 16(e) provides that when the short sale price test in Rule 201 of Regulation SHO is triggered for a covered security, NES will not execute a short sale order in the underlying covered security component of a Complex Order if the price is equal to or below the current national best bid. However, NES will execute a short sale order in the underlying covered security component of a Complex Order if such order is marked “short exempt,” regardless of whether it is at a price that is equal to or below the current national best bid. If NES cannot execute the underlying covered security component of a Complex Order in accordance with Rule 201 of Regulation SHO, the Exchange will hold the Complex Order on the Complex Order Book, if consistent with Member instructions. The order may execute at a price that is not equal to or below the current national best bid. For purposes of this paragraph, the term “covered security” shall have the same meaning as in Rule 201(a)(1) of Regulation SHO. This risk protection will apply wholesale to complex FLEX Orders with a stock component.

Scenario illustrating applicability of the stock buffer described in Options 3, Section 16(a) Price Limits for Complex Orders:

IBM Underlying/Stock NBBO is 1.00 × 2.00

Stock buffer is configured to the lesser of $0.05 or 5%

FLEX Option NBBO does not exist, but the minimum trading increment/minimum price variation (MPV) for option leg executions is $0.01

•

FLEX Auction is entered in a Stock-Complex Strategy encompassing 2 IBM FLEX Put options:

Buy 1 Put (FLEX option leg A) + Buy 1 Put (FLEX option leg B) + Buy 100 shares IBM stock: Buy 110 units of the A + B + Stock strategy @net price of $1.02.

• A firm responds to Sell 110 @net price of $0.89.

FLEX Auction timer passes & auction concludes

• The firm's response trades with the FLEX Auction order 110 @net price of $0.97 because the stock component cannot trade at any price lower than $0.95 ($1.00−$0.05 [price limit for stock component] = $0.95) and the FLEX option legs cannot trade at any price lower than $0.01 as this is the minimum trading increment for option legs; therefore, the minimum stock price of $0.95 plus the $0.01 minimum option leg price means that, despite the $0.89 limit price on the response, the strategy cannot trade below $0.97 ($0.95 + [$0.01*2 legs]).

As it relates to the other Stock-Tied Risk Protections (

i.e.,

the Stock-Tied NBBO protections and the Stock-Tied Reg SHO protections), these will apply wholesale to complex FLEX Orders with a stock component as noted above.

Proposed Section 14(c) will provide that the optional risk protections in Options 3, Section 28 are available to FLEX Options.

206

In particular, the following are optional risk protections in Options 3, Section 28: (1) notional dollar value per order (which will be calculated as quantity multiplied by limit price multiplied by number of underlying shares), (2) daily aggregate notional dollar value, (3) quantity per order, and (4) daily aggregate quantity. In sum, Members may set thresholds for each of the foregoing protections in order to limit the quantity and notional value they can send per order and on aggregate for the day.

206

The Exchange introduced the optional risk protections in Options 3, Section 28 as part of the technology migration to enhanced Nasdaq functionality discussed above. See Securities Exchange Act Release No. 96818 (February 6, 2023), 88 FR 8950 (February 10, 2023) (SR-ISE-2023-06).

P. Data Feeds (Section 15)

The Exchange proposes to specify in Options 3A, Section 15 which data feeds it will disseminate auction notifications for simple and complex FLEX Orders. Proposed Section 15(a) will provide that auction notifications for simple FLEX Orders will be disseminated through the Order Feed, as described in Options 3, Section 23(a)(2).

207

Proposed Section 15(b) will provide that auction notifications for complex FLEX Orders will be disseminated through the Spread Feed, as described in Options 3, Section

23(a)(5).

208

The Exchange notes that this aligns to current functionality where simple auction notifications are disseminated over the Order Feed and complex auction notifications are disseminated over the Spread Feed. Today, simple and complex auction notifications inform Members that an auction order has been accepted by the System and that an auction is commencing. Auction notifications also contain all of the relevant information Members need to respond to that particular auction.

209

As proposed, the simple and complex FLEX auction notifications will likewise inform Members that a FLEX auction order has been accepted by the System, a FLEX auction is commencing, and will also contain all of the relevant information Members need to respond to that particular FLEX auction.

210

The FLEX auction notifications will specify that a particular auction is FLEX versus non-FLEX. As is the case today for non-FLEX auctions, FLEX auction notifications disseminated over the Order Feed and the Spread Feed will be available to all Members that elect to receive such notification messages.

207

The Nasdaq ISE Order Feed (“Order Feed”) provides information on new orders resting on the book (

e.g.

price, quantity and market participant capacity). In addition, the feed also announces all auctions. The data provided for each option series includes the symbols (series and underlying security), put or call indicator, expiration date, the strike price of the series, and whether the option series is available for trading on ISE and identifies if the series is available for closing transactions only. The feed also provides order imbalances on opening/reopening.

208

Nasdaq ISE Spread Feed (“Spread Feed”) is a feed that consists of: (1) options orders for all Complex Orders (

i.e.,

spreads, buy-writes, delta neutral strategies, etc.); (2) data aggregated at the top five price levels (BBO) on both the bid and offer side of the market; (3) last trades information. The Spread Feed provides updates, including prices, side, size and capacity, for every Complex Order placed on the ISE Complex Order book. The Spread Feed shows: (1) aggregate bid/ask quote size; (2) aggregate bid/ask quote size for Professional Customer Orders; and (3) aggregate bid/ask quote size for Priority Customer Orders for ISE traded options. The feed also provides Complex Order auction notifications. The Exchange notes that as applied to FLEX, the majority of the data elements in the Spread Feed will not applicable to FLEX Options (

e.g.,

data aggregated at the top five price levels (BBO) on both the bid and offer side of the market and aggregate bid/ask quote size). While other data elements (

e.g.,

options orders for all Complex Orders and last trades information) also apply to FLEX, the Exchange is pointing out auction notifications in the proposed rule to be transparent about the most salient feature for complex FLEX Orders.

209

For example, at the commencement of a standard, non-FLEX PIM auction, the Exchange sends a broadcast message (

i.e.,

auction notification) that includes the series, price and size of the Agency Order, and whether it is to buy or sell, through the Order Feed.

See

Options 3, Section 13(c).

210

For example, at the commencement of a FLEX PIM Auction, the Exchange would send FLEX PIM Auction notification message detailing the side, size, auction ID, the length of the FLEX PIM Auction period, and FLEX Option series or complex strategy, as applicable, of the Agency Order to all Members that elect to receive FLEX PIM Auction notification messages.

See

proposed Options 3A, Section 12(c)(2).

Q. FLEX Market Makers (Section 16)

Proposed Section 16 will govern FLEX Market Makers on the Exchange. Pursuant to proposed Section 16(a), a FLEX Market Maker will automatically receive an appointment in the same FLEX option class(es) as its non-FLEX class appointments selected pursuant to Op

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.