On March 11, 2026, Nasdaq ISE, LLC filed a proposed rule change with the Securities and Exchange Commission to amend its Pricing Schedule under Options 7, Section 4, focusing on rebates for Priority Customer complex orders. The filing, effective immediately upon submission on March 3, 2026, seeks to refine the tiered rebate system for complex orders in Select Symbols and Non-Select Symbols. This adjustment aims to attract additional Priority Customer order flow, potentially increasing trading opportunities for all market participants. Published in the Federal Register on March 16, 2026, the notice invites public comments, highlighting the ongoing evolution of options market pricing to foster competition.
Background on Nasdaq ISE and Complex Orders
Nasdaq ISE operates as a national securities exchange and self-regulatory organization under the Securities Exchange Act of 1934. Complex orders involve the simultaneous purchase or sale of two or more different options series in the same underlying security, including stock-option orders. The exchange's Pricing Schedule distinguishes between Select Symbols, which are options in the Penny Interval Program, and Non-Select Symbols, encompassing others except specific indices like NDX, XND, or MNX where no rebates apply.
Priority Customers, defined as non-broker-dealer entities placing no more than 390 orders per day on average for their own accounts, receive tiered rebates based on their complex order volume as a percentage of total customer consolidated volume. This volume calculation excludes crossing orders and responses, and it includes affiliated members or entities. The rebates apply per contract per leg when trading against non-Priority Customer interest in the complex order book, with reductions or eliminations if legs interact with the regular order book.
The proposal builds on ISE's existing framework, which has evolved through prior filings to balance incentives with market competitiveness. For instance, similar adjustments have been made in response to competitive pressures from other options exchanges like Cboe or NYSE Arca, which also offer tiered rebates to draw retail and institutional flow.
Key Changes to the Rebate Structure
The filing proposes targeted modifications to the rebate tiers. Specifically, it narrows the volume threshold for Tier 5 from above 0.750 percent to 1.000 percent of customer total consolidated volume to above 0.750 percent to 0.900 percent. Tier 6's threshold shifts from above 1.000 percent to 1.350 percent to above 0.900 percent to 1.350 percent. These adjustments compress the lower end of higher tiers, potentially allowing more participants to qualify sooner.
Rebate amounts are increased for select tiers. For Tier 6, the rebate rises from $0.48 to $0.53 per contract in Select Symbols and from $0.95 to $0.99 in Non-Select Symbols. Tier 8 increases from $0.56 to $0.57 in Select Symbols and $0.10 to $1.11 in Non-Select Symbols. Tier 9 moves from $0.58 to $0.59 and $1.12 to $1.13, respectively. Tier 10 adjusts from $0.59 to $0.60 and $1.15 to $1.16.
These changes do not alter the rebates for Tiers 1 through 4 or Tier 7, maintaining continuity for lower-volume participants. The proposal notes that rebates are reduced by $0.20 in Select Symbols for orders under 50 contracts trading with the regular book, with no rebates if any leg is 50 contracts or more in Select Symbols or any size in Non-Select Symbols interacting with the regular book.
Statutory Basis and Regulatory Context
ISE asserts the changes align with Section 6(b) of the Securities Exchange Act, promoting equitable and reasonable fees while avoiding unfair discrimination. The filing emphasizes uniformity in applying rebates to qualifying members, enhancing liquidity that benefits all participants. It references the competitive landscape, citing Regulation NMS's preference for market-driven pricing over regulatory mandates.
The proposal invokes precedents like the D.C. Circuit's decision in NetCoalition v. SEC (2010), which upheld market-based fee evaluations. ISE argues the adjustments will not burden competition, as they encourage order flow without disadvantaging non-Priority Customers, who include market makers and professional customers. The immediate effectiveness under Section 19(b)(3)(A)(ii) allows prompt implementation while permitting SEC suspension if needed.
Perspectives from Market Participants
Industry views on such rebate tweaks vary. Proponents, including retail brokers, may see enhanced rebates as a boon for attracting client orders, potentially lowering effective trading costs and boosting volume. As ISE states in the filing, 'Priority Customer order flow enhances liquidity on the Exchange to the benefit of all market participants by providing more trading opportunities.'
Critics, such as competing exchanges or institutional traders, might argue that escalating rebates could distort market dynamics, favoring high-volume Priority Customers and pressuring smaller players. The filing acknowledges inter-market competition, noting participants can route orders elsewhere if fees seem excessive. Intra-market, the uniform application aims to mitigate discrimination, though some non-Priority Customers may perceive rebates as indirectly subsidizing certain flows.
Short-term implications include potential upticks in complex order volume on ISE, as members recalibrate strategies to hit revised tiers. Long-term, this could influence broader options market liquidity and pricing norms, especially if other exchanges respond with similar incentives.
Potential Implications and Broader Impact
The adjustments may drive incremental order flow, fostering deeper liquidity pools and tighter spreads in complex orders. However, they could also intensify rebate wars among exchanges, raising questions about sustainability. Regulators like the SEC monitor such filings to ensure they do not undermine fair access or market integrity.
In summary, ISE's proposal refines its rebate program to stimulate participation, grounded in statutory requirements and competitive realities. While enhancing opportunities, it underscores the delicate balance in options pricing.
