[Federal Register Volume 65, Number 250 (Thursday, December 28, 2000)]
[Notices]
[Pages 82426-82428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33130]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43743; File No. SR-ISE-00-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange, LLC Relating to an 
Interim Intermarket Linkage

December 19, 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 November 15, 2000, the International Securities Exchange LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the ISE. On December 13, 2000, the Exchange submitted Amendment No. 
1 to the proposed rule change.\3\ 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.
    \3\ In Amendment No. 1, the Exchange specified that the proposed 
interim linkage would be for a pilot period expiring on January 31, 
2002. See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division 
of Market Regulation, Commission, dated December 11, 2000 
(``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing a rule authorizing implementation of 
``interim linkages'' with the other options exchanges. The interim 
linkage will permit qualified market makers on participating exchanges 
to send specified types of principal orders to other participating 
exchanges for automatic execution as if such orders were customer 
orders. Below is the text of the proposed rule change. Proposed new 
language is italicized.
    Rule 721. Pilot Program for Away Market Maker Access
    (a) Definitions. Solely for the purpose of this Rule:
    (1) ``Corresponding Rule'' means a rule of a Participating Exchange 
that is substantially identical to this Rule 721.
    (2) ``Customer Size'' means the lesser of (i) the number of option 
contracts that the Participating Exchange sending the order guarantees 
it will automatically execute at its disseminated quotation in an 
Eligible Option Class for Public Customer Orders and (ii) the number of 
option contracts that the Participating Exchange receiving the order 
guarantees it will automatically execute at its disseminated quotation 
in an Eligible Option Class for Public Customer Orders. This number 
shall be no fewer than 10.
    (3) ``Eligible Away Market Maker'' (``EAMM'') means, with respect 
to an Eligible Option Class, a market maker, as that term is defined in 
Section 3(a)(22) of the Exchange Act, on a Participating Exchange that:
    (i) is assigned to, and is providing two-sided quotations in the 
Eligible Option Class; and
    (ii) that is participating in its market's automatic execution 
system in such Eligible Option Class.
    (4) ``Eligible Away Principal Market Maker'' (``EAPMM'') means: 
with respect to the American Stock Exchange and the Philadelphia Stock 
Exchange, a Specialist in an Eligible Option Class; with respect to the 
Chicago Board Options Exchange, a Designated Primary Market Maker in an 
Eligible Option Class; and with respect to the Pacific Exchange, a Lead 
Market Maker in an Eligible Option Class.
    (5) ``Eligible Option Class'' means all option series overlying a 
security, including both put and call options, which class is traded by 
the Exchange and at least one other Participating Exchange, to the 
extent that such Participating Exchanges have mutually agreed to 
include the option class in the Pilot Program.
    (6) ``Eligible Order'' means an order for the account of a market 
maker, an EAMM or an EAPMM that can be sent to a Participating Exchange 
marked as a Public Customer Order pursuant to

[[Page 82427]]

provisions of paragraphs (b), (c), and (d) of this Rule.
    (7) ``Participating Exchange'' means (i) the Exchange and (ii) one 
or more of the American Stock Exchange, the Chicago Board Options 
Exchange, the Pacific Exchange, and the Philadelphia Stock Exchange, as 
the President of the Exchange, or his designee, has designated from 
time to time as having adopted a Corresponding Rule.
    (8) ``Pilot Program'' means the program established by this Rule 
and the Corresponding Rules of the other Participating Exchanges.
    (9) ``Principal Size'' means the number of option contracts that 
two or more Participating Exchanges mutually agree that they will 
automatically execute during the Pilot Program at their disseminated 
quotation for orders sent for the principal account of a market maker, 
an EAMM or an EAPMM that does not correspond to a Underlying Customer 
Order. This number shall be no fewer than 10.
    (10) ``Underlying Customer Order'' means an unexecuted Public 
Customer Order for which a Primary Market Maker or EAPMM is acting as 
agent and which underlies an Eligible Order.
    (b) Access to Other Participating Exchanges by Market Makers. 
Pursuant to the Pilot Program, a market maker participating in the 
program may send an order to another Participating Exchange for 
execution as a Public Customer Order only if the market maker complies 
with the following conditions:
    (1) the order is an immediate-or-cancel order;
    (2) the price of the order is equal to the bid (offer) disseminated 
by the Participating Exchange at the time the market maker sends an 
order to sell (buy), and such bid (offer) is equal to the national 
highest bid (offer) in that series of an Eligible Option Class, as 
calculated by the Exchange;
    (3) the Exchange's bid (offer) at the time the market maker sends 
the order to sell (buy) is not then equal to the national highest bid 
(offer) in that series of an Eligible Option Class, as calculated by 
the Exchange;
    (4) the order is no larger than the Principal Size; and
    (5) except with respect to orders a Primary Market Maker is sending 
pursuant to paragraph (c), below, the market maker has not received an 
execution of another such order in the same series of an Eligible 
Option Class on the same Participating Exchange pursuant to the Pilot 
Program in the previous one minute period.
    (c) Additional Access to Other Participating Exchanges by Primary 
Market Makers. In addition to the access to other Participating 
Exchanges provided in paragraph (b), above, a Primary Market Maker 
participating in the Pilot Program may send an order to another 
Participating Exchange for execution as a Public Customer if:
    (1) the Primary Market Maker complies with subparagraphs (1) 
through (3) of paragraph (b), above:
    (2) the order reflects the same terms as an Underlying Customer 
Order the Primary Market Maker is holding; and
    (3) the order is no larger than the Customer Size.
    (d) Access to the Exchange by Eligible Market Makers on other 
Participating Exchanges. Notwithstanding any other Rule of the 
Exchange, an Electronic Access Member may send to the Exchange for 
execution as a Public Customer Order an order for the account of an 
EAMM or an EAPMM that complies with the Corresponding Rule of the 
EAMM's or EAPMM's Participating Exchange.
    (e) Implementation of the Pilot Program. The President, or his 
designee, may implement the Pilot Program, in whole or in part, with 
respect to specific Participating Exchanges, to the extent that any 
such Participating Exchange has agreed to implement corresponding 
aspects of the Pilot Program. Primary Market Maker participation in the 
Pilot Program shall be voluntary.

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 ISE 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 ISE 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 implement certain 
aspects of an intermarket options linkage on an ``interim'' basis.\4\ 
This interim linkage would utilize existing order types to facilitate 
the sending and receiving of order flow between ISE market makers and 
their counterparts on the other options exchanges as an interim step 
towards development of a ``permanent'' linkage.
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    \4\ Under the proposal, the interim linkage would be for a pilot 
period expiring on January 31, 2002. See Amendment No. 1, supra note 
3.
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    By way of background, the Commission has approved a linkage plan 
that now includes all five options exchanges.\5\ The options exchanges 
continue to work towards implementation of this linkage, which likely 
will include contracting with a third party to build a linkage 
infrastructure. Since this will take a significant amount of time, the 
options exchanges have discussed implementing an ``interim'' linkage. 
Such a linkage would use the existing market infrastructure to route 
orders between market makers on the participating exchanges in a more 
efficient manner.
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    \5\ See Securities Exchange Act Release Nos. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000); 43573 (November 16, 2000), 65 
FR 70851 (November 28, 2000); and 43574 (November 16, 2000), 65 FR 
70850 (November 28, 2000).
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    The key component of the interim linkage would be for the 
participating exchanges to open their automated customer execution 
systems, on a limited basis, to market maker orders. Specifically, 
market makers would be able to designate certain orders as ``customer'' 
orders, and thus would receive automatic execution of those orders on 
participating exchanges.
    This proposed rule would authorize the ISE to implement bilateral 
or multilateral interim arrangements with the other exchanges to 
provide for equal access between market makers on our respective 
exchanges. The Exchange currently anticipates that the initial 
arrangements would allow ISE Primary Market Makers (``PMMs'') and their 
equivalents on the other exchanges, when they are holding customer 
orders, to send orders reflecting the customer orders to the other 
market for execution when the other market has a better quote. Such 
orders would be limited in size to the lesser of the size of the two 
markets ``firm'' quotes for customer orders. The Exchange expects that 
the interim linkage may expand to include limited access for pure 
principal orders, for orders of no more than 10 contracts.
    All interim linkage orders must be ``immediate or cancel'' (that 
is, they cannot be placed on an exchange's limit order book), and a 
market maker can send a linkage order only when the other (receiving) 
market is displaying the best national bid or offer and the sending 
market is an inferior price. This will allow a market maker to access 
the better price for its customer. In addition, if the interim linkage 
includes principal orders, it would allow market makers to attempt to 
``clear'' another market

[[Page 82428]]

displaying a superior quote. Any exchange participating in the interim 
linkage will implement heightened surveillance procedures to help 
ensure that their market makers send only properly-qualified orders 
through the linkage.
    PMM participation in the interim linkage will be voluntary. Only 
when a PMM and its equivalent on another exchange believe that this 
form of mutual access would be advantageous will the exchanges employ 
the interim linkage procedures. The ISE believes that the interim 
linkage will benefit investors and will provide useful experience that 
will help the exchanges in implementing the full linkage.
2. Statutory Basis
    The ISE believes that the basis under the Act for this proposed 
rule change is the requirement under Section 6(b)(5)\6\ that an 
exchange have rules that are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transaction in 
securities, to remove impediments to and perfect the mechanism for a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 also will be 
available for inspection and copying at the principal office of the 
ISE. All submissions should refer to File No. SR-ISE-00-15 and should 
be submitted by January 18, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-33130 Filed 12-27-00; 8:45 am]
BILLING CODE 8010-01-M