[Federal Register Volume 66, Number 45 (Wednesday, March 7, 2001)]
[Notices]
[Pages 13820-13821]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5541]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44017; File No. SR-ISE-00-20]


Self Regulatory Organizations; Order Approving Proposed Rule 
Change by the International Securities Exchange LLC Relating to 
Limitations on Orders

February 28, 2001.

I. Introduction

    On November 20, 2000, the International Securities Exchange LLC 
(``ISE'' or ``Exchange'') 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\ a proposed rule change to amend ISE Rule 717 relating to 
limitations on orders.\3\ The proposed rule change was published for 
comment in the Federal Register on January 16, 2001.\4\ The Commission 
received no comments on the proposed rule change. This order approves 
the proposal.
---------------------------------------------------------------------------

    \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 filed Amendment No. 1 that entirely 
replaced the original rule filing.
    \4\ See Securities Exchange Act Release No. 43803 (January 4, 
2001), 66 FR 3624 (January 16, 2001).
---------------------------------------------------------------------------

II. Description of the Proposal

    Exchange market makers must be firm at their quotations for all 
orders, although they can set different sizes for customer and broker-
dealer orders. When the size 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 an 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. Under the ISE's proposed new 
paragraph (h), 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 also proposes to amend paragraph (g) of ISE Rule 717, 
which currently prohibits an Electronic Access Member (``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.

III. Discussion

    The Commission has reviewed the ISE's proposed rule change and 
finds, for the reasons set forth below, that the proposal is consistent 
with the requirements of section 6 of the Act \5\ and the rules and 
regulations thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f.
---------------------------------------------------------------------------

    The Commission notes that amending ISE Rule 717 to prohibit members 
from causing the entry of more than one order for the same beneficial 
account within a fifteen second period should help reduce ISE market 
maker risk exposure. The Commission believes that fifteen seconds is a 
sufficient time period to allow market makers to change their 
quotations following an execution, while at the same time not unduly 
long

[[Page 13821]]

as to place a burden on investors seeking to execute transactions on 
the Exchange.
    The Commission also notes that the amendment to ISE Rule 717(g), 
which will limit the scope of that rule solely to prohibit EAMs from 
entering orders for ISE market maker accounts, recognizes that there 
are legitimate reasons why a member may enter orders on the Exchange 
through an EAM. These reasons can vary. For example, some EAMs may 
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 thus route orders through those 
EAMs.
    Therefore, the Commission finds that the proposed revisions to ISE 
Rule 717 are consistent with section 6(b) of the Act \6\ in general, 
and furthers the objectives of section 6(b)(5) \7\ in particular, in 
that they are 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.\8\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ In approving the proposal, the Commission has considered the 
rule's impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-ISE-00-20) is approved.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-5541 Filed 3-6-01; 8:45 am]
BILLING CODE 8010-01-M