[Federal Register Volume 66, Number 151 (Monday, August 6, 2001)]
[Notices]
[Pages 41074-41075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19581]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44612; File No. SR-ISE-2001-19]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange LLC Relating to 
Facilitation of Customer Orders

July 27, 2001.
    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 May 30, 2001, 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. 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 ISE is proposing to amend its rule regarding the facilitation 
of customer orders to reduce the order exposure time from 30 to five 
seconds.

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 Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

[[Page 41075]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

I. Purpose
    ISE rules provide that an Electronic Access Member (``EAM'') may 
not execute its own customer orders as principal unless it either: (1) 
Enters the customer order into the market and waits at least 30 seconds 
before entering a counter proprietary order \3\; or (2) enters the 
customer order into the Facilitation Mechanism, which gives the trading 
crowd 30 seconds to respond to the order.\4\ A member can improve the 
price of an order being displayed in the Facilitation Mechanism only by 
entering a quote or order in the ISE trading system. Use of the 
Facilitation Mechanism generally guarantees the entering EAM that it 
will be able to trade against 40 percent of the order.
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    \3\ ISE Rule 717(d).
    \4\ ISE Rule 716(d).
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    The ISE states that despite its rule establishing a Facilitation 
Mechanism, the Exchange has failed to capture significant facilitation 
order flow. The ISE further states that is members explain that the 
rule's 30-second exposure requirement is a primary reason why they do 
not use this mechanism. In contrast to the Exchange's requirements, a 
member can facilitate an order by taking it to the floor of another 
options exchange, ``expose'' it for an instant by announcing it to the 
trading crowd on the floor, and then immediately trade against the 
order.\5\ The ISE believes that for the Exchange to be on parity with 
the floor-based exchanges, and thus to permit the ISE to be in an equal 
competitive position to attract facilitation order flow to the 
Exchange, the ISE proposes to amend its rules to reduce the 30 second 
exposure time required for the Facilitation Mechanism to five seconds.
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    \5\ The floor-based exchanges also provide the entering broker-
dealer a minimum guarantee of 40 percent of the order, but without 
any minimum exposure time. See Commentary .02 to American Stock 
Exchange Rule 950(d); Chicago Board Options Exchange Rule 6.74(d); 
and Pacific Exchange Rule 6.47(b).
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    The ISE believes that this shortened exposure period would be fully 
consistent with the electronic nature of its trading system. According 
to the ISE, the Exchange's members have implemented, or have the 
ability to implement, systems that monitor the Facilitation Mechanism 
broadcast messages and can automatically respond based upon pre-set 
parameters. In this electronic environment, the Exchange state, it is 
not necessary to provide an exposure time sufficiently long to permit a 
person, in all cases, to manually respond to a Facilitation Order 
broadcast in order to provide the opportunity for crowd interaction. 
Thus, the Exchange states, an exposure period of five seconds would 
permit exposure of orders on the ISE in a manner consistent with its 
electronic market while addressing the Exchange's competitive 
concerns.\6\
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    \6\ The filing also would delete as unnecessary the requirement 
that, to improve the facilitation price, a member must improve its 
quotation or order at least 10 seconds prior to the expiration of 
the exposure period.
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2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \7\ 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 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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    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The ISE 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

    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 ISE 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.
    In addition to any other views that interested persons may wish to 
express, the Commission requests comments specifically on whether 
electronic programs or systems are available that would enable ISE 
members to monitor the Facilitation Mechanism broadcast messages and 
automatically respond based upon pre-set parameters, such that a five-
second exposure period would provide adequate time for crowd members to 
interact with an order before it is executed by the EAM. The Commission 
also requests comments on whether the manner in which orders are 
exposed and executed through the ISE Facilitation Mechanism under the 
proposed rule change would be comparable to the manner in which 
facilitation orders are exposed and executed on floor based exchanges.
    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 the filing will also be 
available for inspection and copying at the principal offices of the 
ISE. All submissions should refer to File No. SR-ISE-2001-19 and should 
be submitted by August 27, 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. 01-19581 Filed 8-3-01; 8:45 am]
BILLING CODE 8010-01-M