[Federal Register Volume 66, Number 10 (Tuesday, January 16, 2001)]
[Notices]
[Pages 3624-3625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1152]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43803; File No. SR-ISE-00-20]


Self Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange LLC Relating to 
Limitations on Orders

January 4, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule19b-4 thereunder,\2\ notice is hereby given that 
on November 20, 2000, the International Securities Exchange LLC 
(``ISE'' or ``Exchange'') 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.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The ISE filed its proposed rule change on November 20, 2000. 
On December 18, 2000, the ISE field Amendment No. 1 that entirely 
replaced the original rule filing.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing to amend Rule 717 to adopt a rule 
prohibiting the entry of more than one order for the same beneficial 
account within a fifteen second period and to allow Electronic Access 
Members (``EAMs'') to enter orders on behalf of another member other 
than an order for an ISE market maker account. Proposed new language is 
in italics; proposed deletions are in brackets.
* * * * *

717. Limitations on Orders

* * * * *
    (g) Orders for the Account of Another Member.
    Absent an exemption from an Exchange official designated by the 
Board, Electronic Access Members shall not cause the entry of orders 
for [another Member] the account of an ISE market maker that is 
exempt from the provisions of Regulation T of the Board of Governors 
of the Federal Reserve System pursuant to Section 7(c)(2) of the 
Exchange Act.
    (h) Multiple Orders for Same Beneficial Account.
    Members shall not cause the entry of more than one order every 
fifteen (15) seconds for the account of the same beneficial owner in 
options on the same underlying security; provided, however that this 
shall not apply to multiple orders in different series of options on 
the same underlying security if such orders are part of a spread.
* * * * *

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
    Exchange market makers must be firm at their quotations for all 
orders, although they can set different sizes for

[[Page 3625]]

customer and broker-dealer orders. When the sizes of a particular quote 
is exhausted, the Exchange's trading system automatically moves the 
quote to an inferior price according to parameters preset by the market 
maker. However, the system moves only the quotation in the options 
series in which there was a trade, leaving the market maker exposed to 
the risk that multiple orders may be executed nearly simultaneously in 
many series of the same option. This situation increases in ISE market 
maker's ``delta risk'' (the amount of underlying stock that would be 
necessary to hedge the options position), due to exposure across 
multiple series. This could result in ISE market makers providing more 
liquidity than may be available in the underlying stock.
    The proposed rule change states that members shall not cause the 
entry of more than one order every fifteen seconds for the account of 
the same beneficial owner in options on the same underlying security. 
The Exchange represents that the proposed rule change is designed to 
reduce ISE market maker risk exposure by limiting the ability of a 
person to rapidly send in orders in the same series or multiple series 
of the same underlying security. The Exchange believes that fifteen 
seconds is sufficient to allow market makers to move quotations 
following an execution, while at the same time not unduly long as to 
place a burden on investors seeking execution on the Exchange.
    The Exchange also proposes to amend paragraph (g) of ISE Rule 717, 
which currently prohibits an EAM from entering an order for any other 
member of the Exchange. The amendment will limit the scope of ISE Rule 
717(g) to only prohibit EAMs from entering orders for ISE market maker 
accounts. The Exchange believes that this reflects the original intent 
of ISE Rule 717(g), which was to prevent market makers from entering 
orders through other members, thus disguising their trading in an 
attempt to avoid the requirements in ISE Rule 805 that they do a 
specified percentage of their volume in their assigned options classes. 
The proposed rule change recognizes that there are legitimate reasons 
why a member may enter orders on the Exchange through an EAM. These 
reasons vary. For example, some EAMs desire a temporary means of 
routing orders to the ISE until they are connected directly to the 
Exchange. In addition, a few members have clearing relationships with 
EAMs and therefore route orders through them. The ISE represents that 
in its experience to date, there is no regulatory reason why this type 
of order routing should be limited.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \4\ in general, and furthers the 
objectives of Section 6(b)(5) \5\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, 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.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
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 did not solicit or receive written comments on 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 Exchange 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, as amended, 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 at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-ISE-00-20 and should be submitted by February 6, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-1152 Filed 1-12-01; 8:45 am]
BILLING CODE 8010-01-M