[Federal Register Volume 65, Number 241 (Thursday, December 14, 2000)]
[Notices]
[Pages 78233-78234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31800]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43688; File No. SR-ISE-00-24]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the International Securities 
Exchange LLC Relating to a Marketing Fee To Fund Payment for Order Flow

December 7, 2000.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 1, 2000, the International Securities Exchange LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing to establish a new marketing fee to fund 
a payment for order flow program. This will be an interim fee, pending 
both approval of the Exchange's permanent payment for order flow 
program (``Permanent Program'') and the establishment of fees under 
that program.\3\ The fee will be $.75 a contract on all Primary Market 
Maker (``PMM'') and Competitive Market Maker executions against 
customer orders. This fee will terminate at the earlier of January 15, 
2001, or the effectiveness of a fee to fund the Permanent Program.
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    \3\ On September 12, 2000, the Exchange filed with the 
Commission a rule change proposing to establish the Permanent 
Program. See Securities Exchange Act Release No. 43462 (October 19, 
2000), 65 FR 64466 (October 27, 2000). By the terms of that 
proposal, the Exchange would be required to submit a separate rule 
change filing pursuant to Section 19(b)(3)(A) of the Act each time 
it sets the specific amount of any fees authorized under the 
program.
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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 purpose of the proposed rule change is to provide a source of 
funding for a payment for order flow program. This will be an interim 
program expiring on the earlier of January 15, 2001, or Commission 
approval of the Permanent Program and the establishment of a fee to 
fund that Program.
    The Exchange will segregate the funds the fees generate 
proportionately to the groups of securities (or ``bins'') that 
generated the funds. The PMM in each bin will have full and exclusive 
discretion on how to use those funds to pay for order flow. The 
Exchange will make the payments to Electronic Access Members based on 
the PMM's directives.
    The Exchange will be issuing appropriate circulars to its members 
emphasizing their disclosure and best execution obligations. The 
Exchange also will be providing to members various reports and other 
information demonstrating the quality of executions that they receive 
on the Exchange.
2. Statutory Basis
    The Exchange states that the basis for the proposed rule change is 
the requirement under section 6(b)(4) of the Act \4\ that an exchange 
have an equitable allocation of reasonable dues, fees, and other 
charges among its members and other persons using its facilities.
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    \4\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchanges believes that the proposed rule change does not 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    The foregoing rule change, which establishes or changes a due, fee, 
or other charge applicable to members of the Exchange, has become 
effective pursuant to section 19(b)(3)(A) \5\ of the Act and 
subparagraph (f)(2) of Rule 19b-4 thereunder.\6\ At any time within 60 
days of the filing of the rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors,

[[Page 78234]]

or otherwise in furtherance of the purposes of the Act.
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    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    The Commission has frequently raised serious concerns about payment 
for order flow and internalization.\7\ Payment for order flow is of 
concern because brokers who are paid to send their customers' orders to 
one exchange have a conflict of interest that may reduce their 
commitment to the duty they owe their customers to find the best 
execution available. While payment for order flow has been a common 
practice in the equities markets for some time, only recently has 
payment for order flow developed in the options markets. Despite these 
concerns, however, the ISE's proposal involves the imposition of a fee, 
and the Act gives exchanges wide latitude to establish, revise, and 
collect fees and other charges without prior Commission approval. The 
Commission invites interested persons to submit written data, views, 
and arguments concerning the foregoing, including whether the proposed 
rule change is consistent with the Act. In particular, the Commission 
asks persons who submit comments whether the payment for order flow 
facilitated by the ISE's proposal raises greater or different concerns 
than payment for order flow at other option exchanges. After receiving 
comments, and at any time within 60 days from the date the ISE filed 
its proposal, the Commission can decide to require the ISE to stop 
collecting the fee and await Commission approval of the Permanent 
Program.
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    \7\ See Securities Exchange Act Release Nos. 43290 (September 
13, 2000), 65 FR 57213 (September 21, 2000); 43228 (August 30, 
2000), 65 FR 54330 (September 7, 2000); 43177 (August 18, 2000), 65 
FR 51889 (August 25, 2000); 43112 (August 3, 2000), 65 FR 49040 
(August 10, 2000); 42450 (February 23, 2000), 65 FR 10577 (February 
28, 2000); 34902 (October 27, 1994), 59 FR 55006 (November 2, 1994). 
See also Securities Exchange Act Release No. 43590 (November 17, 
2000), 65 FR 75414 (December 1, 2000).
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    Persons making written submissions should file six copies thereof 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the ISE. All 
submissions should refer to File No. SR-ISE-00-24, and should be 
submitted by January 4, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-31800 Filed 12-13-00; 8:45 am]
BILLING CODE 8010-01-M