[Federal Register Volume 66, Number 25 (Tuesday, February 6, 2001)]
[Notices]
[Pages 9112-9113]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3003]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43904; File Nos. SR-CBOE-00-58 and SR-ISE-00-15]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; International Securities Exchange, LLC; Order Approving Proposed 
Rule Changes Relating to an Interim Intermarket Linkage

January 30, 2001.

I. Introduction

    On November 15, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'') and the International Securities Exchange LLC (``ISE'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposals to adopt rules 
providing for the implementation of ``interim linkages'' with other 
option exchanges. On December 13, 2000, the CBOE and ISE (collectively 
``Exchanges'') each submitted amendments to their rule proposals.\3\ On 
December 19, 2000, the Exchanges' rule proposals were published for 
comment in the Federal Register.\4\ The Commission did not receive 
comments on either the CBOE or the ISE proposals. This order approves 
the CBOE and the ISE proposed rule changes, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letters from Timothy Thompson, Assistant General 
Counsel, Legal Department, CBOE, and from Michael Simon, Senior Vice 
President and General Counsel, ISE, to Nancy Sanow, Assistant 
Director, Division of Market Regulation, Commission, dated December 
12, 2000 and December 11, 2000, respectively.
    \4\ See Securities Exchange Act Release Nos. 43745 (December 19, 
2000), 65 FR 82418 (File No. SR-CBOE-0058) and 43743 (December 19, 
2000), 65 FR 82426 (File No. SR-ISE-0015).
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II. Description of the Proposed Rule Changes

    The CBOE and ISE propose to implement certain aspects of an 
intermarket options linkage on an ``interim'' basis.\5\ The Exchanges 
represent that this interim linkage would utilize existing order types 
to facilitate the sending and receiving of order flow between CBOE 
market makers and ISE market makers and their counterparts on the other 
options exchanges as an interim step towards development of a 
``permanent'' linkage.\6\
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    \5\ Under the proposal, the interim linkage would be for a pilot 
period expiring on January 31, 2002.
    \6\ On July 28, 2000, the Commission approved a linkage plan 
that now includes all five options exchanges. 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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[[Page 9113]]

    The Exchanges represent that all of the options exchanges continue 
to work towards implementation of a permanent linkage, which likely 
will include contracting with a third party to build a linkage 
infrastructure. According to the Exchanges, because the implementation 
of a permanent linkage is expected to take a significant amount of 
time, the options exchanges have proposed implementing an ``interim'' 
linkage. An interim linkage would use the existing market 
infrastructure to route orders between market makers on the 
participating exchanges in a more efficient manner. The Exchanges 
propose that the interim linkage would be in effect on a pilot basis 
until January 31, 2002.\7\
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    \7\ See supra note 3.
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    The interim linkage would require 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.
    The proposals would authorize the CBOE and the ISE to implement 
bilateral or multilateral interim arrangements with the other options 
exchanges to provide for equal access between market makers on the 
respective exchanges. The Exchanges represent that the initial 
arrangements would allow ISE Primary Market Makers (``PPMs''), CBOE 
Designated Primary Market Makers (``DPMs''), and their equivalents on 
the other exchanges,\8\ when they are holding customer orders, to send 
orders reflecting the customer orders to another market for execution 
when such 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 Exchanges expect that the interim linkage may 
expand to include limited access for pure principal orders, for orders 
of no more than 10 contracts.
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    \8\ Specialists on other exchanges would be permitted to use the 
interim linkage after filing appropriate rules with the Commission 
and executing agreements with the participating exchanges.
    \9\ Thus, interim linkage orders could not be placed on an 
exchange's limit order book.
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    Under the Exchanges' proposals, all interim linkage orders must be 
``immediate or cancel'',\9\ 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 displaying an inferior price. 
The Exchanges represent that 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 displaying a superior quote. Further, the 
Exchanges represent that they will implement heightened surveillance 
procedures to help ensure that their market makers send only properly 
qualified orders through the interim linkage.
    DPM and PMM participation in the interim linkage would be voluntary 
under the terms of the proposals. Only when a DPM or PMM and its 
equivalent on another exchange believe that this form of mutual access 
would be advantageous would the exchanges employ the interim linkage 
procedures. The Exchanges represent that the interim linkage will 
benefit investors and will provide useful experience that will help the 
Exchanges in implementing the permanent linkage.

III. Discussion

    After careful review, the Commission finds that the CBOE and the 
ISE proposed rule changes are consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities exchange \10\ and, in particular, the requirements of 
Section 6 of the Act.\11\ Among other provisions, Section 6(b)(5) of 
the Act requires that the rules of an exchange be designed to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating securities transactions; remove impediments to and perfect 
the mechanism of a free and open market and a national market system; 
and protect investors and the public interest.
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    \10\ The Commission has considered the proposed rules' impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that developing and fully implementing a 
permanent intermarket linkage may take a significant amount of time. 
According to the Exchanges, the interim linkage will be introduced on a 
voluntary basis, to allow participating exchanges to route customer 
orders to an away market that is displaying the best available price in 
a multiply-traded options class. The Commission believes that this 
interim linkage should enable customers to benefit from the Exchanges' 
immediate ability to use their existing market infrastructure to route 
their orders between market makers on the participating exchanges in a 
more efficient manner.\12\
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    \12\ Id.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule changes (SR-CBOE-00-58 and SR-ISE-00-
15) are approved, as amended, on a pilot basis until January 31, 2002.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3003 Filed 2-5-01; 8:45 am]
BILLING CODE 8010-01-M