The Securities and Exchange Commission has published a notice of Nasdaq ISE, LLC's proposed rule change to enhance its Flexible Exchange Options (FLEX) trading framework. Filed on January 27, 2026, and effective immediately under Section 19(b)(3)(A) of the Securities Exchange Act of 1934, the proposal introduces three main modifications: allowing prices to be expressed as percentages, adopting Delta-Adjusted at Close (DAC) order instructions, and permitting complex FLEX orders to combine FLEX and non-FLEX option series. This development, detailed in SEC Release No. 34-104724, aims to provide greater customization and efficiency for institutional investors and market makers in the options market. By aligning closely with rules at Cboe Exchange, Inc., ISE seeks to foster competition and innovation in a segment traditionally overshadowed by over-the-counter trading.
Background and Key Players
FLEX options, introduced in the 1990s, allow investors to customize contract terms such as expiration dates, strike prices, and exercise styles, differing from standardized options. Nasdaq ISE, a subsidiary of Nasdaq, Inc., operates as a self-regulatory organization under SEC oversight. The proposal builds on existing FLEX rules in ISE's Options 3A section, responding to market demands for more sophisticated tools amid rising volatility and complex hedging needs.
Key players include ISE's management, which prepared the filing, and the SEC, which is soliciting public comments until February 23, 2026. The proposal references Cboe's established FLEX framework, indicating a harmonization effort. No specific comments were received prior to filing, but ISE asserts the changes raise no novel issues, as they mirror Cboe's approved rules. This alignment could reduce regulatory fragmentation, benefiting large institutions like hedge funds and ETF issuers that use FLEX for tailored strategies.
Proposed Changes and Mechanics
The first enhancement allows FLEX prices—including exercise prices, bids, and offers—to be expressed as a percentage of the underlying security's or index's closing value, rather than fixed dollar amounts. For instance, under amended Options 3A, Section 3(c)(6), exercise prices can be in 0.01% increments, with the system rounding to the nearest fixed minimum increment after the close. This mirrors Cboe Rule 4.21(b)(6)(A) and provides investors with more precise tools for percentage-based strategies, such as those tied to market closes.
Second, ISE proposes DAC orders, which adjust execution prices post-close based on a delta value applied to underlying price changes. As outlined in new Options 3A, Sections 6(c) and 7(c), members designate a delta (e.g., 0.50 for calls) upon entry, with adjustments calculated as: delta-adjusted price = original price + (change in underlying × delta). Restrictions apply: simple DAC orders in single-stock equity options are limited to 45 minutes before close and prohibited on expiration day to mitigate manipulation risks. This feature, akin to Cboe Rules 5.6(c) and 5.33(b)(5), targets funds using delta-neutral strategies, reducing operational risks in near-close executions.
Third, the filing permits complex FLEX orders to mix FLEX and non-FLEX legs (FLEX v. Non-FLEX Orders), amending Options 3A, Section 7(a). Previously, complex FLEX orders were limited to FLEX series only. Now, executions must protect non-FLEX legs' NBBO and priority customer orders, with FLEX legs adjusted to meet net prices. This aligns with Cboe Rule 5.70(b) and streamlines trading for strategies combining customized and listed options.
Additional tweaks include clarifications on trading halts, position limits, and risk protections, ensuring consistency with broader ISE rules.
Legal Precedents and Political Context
The proposal invokes Section 6(b)(5) of the Exchange Act, emphasizing fair and orderly markets. It draws from SEC approvals of similar Cboe enhancements, such as Release No. 90319 (2020) for DAC orders and No. 102297 (2025) for mixed FLEX orders. No direct judicial precedents are cited, but the filing aligns with SEC's Regulation NMS goals of promoting competition over intervention.
Politically, this occurs amid ongoing debates over market structure reforms, with the SEC under Chair Gary Gensler focusing on transparency in customized derivatives. ISE argues the changes migrate OTC activity to exchanges, enhancing oversight without burdening competition.
Implications and Perspectives
Short-term, these enhancements could boost ISE's FLEX volume by attracting institutional traders seeking efficient hedging. For example, ETF issuers might use DAC for buffer strategies, as illustrated in ISE's examples where delta adjustments yield precise close-based pricing without timing risks. Long-term, greater FLEX adoption may reduce OTC opacity, but critics—potentially from retail advocacy groups—might argue it complicates markets for non-professionals.
From an investor perspective, proponents see improved risk management, while skeptics worry about potential manipulation in less liquid underlyings, addressed by ISE's restrictions. Market makers benefit from expanded tools, but smaller firms might face technological hurdles. Overall, the proposal balances innovation with safeguards, as ISE commits to surveillance and capacity readiness.
In conclusion, ISE's FLEX updates represent a strategic evolution in options trading, potentially reshaping how customized strategies are executed. Key takeaways include enhanced flexibility for investors and alignment with industry standards. Looking ahead, public comments could influence refinements, with implementation targeted by December 20, 2026. Ongoing debates may center on balancing customization with market stability, while challenges like system integration and regulatory scrutiny loom. The SEC's review will determine if these changes fully advance fair competition without unintended risks.
