[Federal Register Volume 66, Number 239 (Wednesday, December 12, 2001)]
[Notices]
[Pages 64325-64326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30656]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45128; File No. SR-ISE-2001-31]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the International Securities 
Exchange LLC and Amendment No. 1 Thereto Relating to Payment for Order 
Flow Fees

December 4. 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 16, 2001, the International Security Exchange LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which the ISE has prepared. On November 28, 
2001, the ISE submitted Amendment No. 1 to the proposed rule change. 
The Commission is publishing this notice to solicit comments from 
interested persons on the proposed rule change, as amended.
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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 establish a ceiling of $750,000 in each of 
the ten payment-for-order-flow funds that the ISE maintains. The text 
of the proposed

[[Page 64326]]

rule change is available at the ISE and the Commission.

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
    Under ISE Rule 802(b), the ISE has divided the options it trades 
into 10 groups, with one Primary Market Maker (``PMM'') assigned to 
each group. The ISE maintains a payment-for-order-flow fund for each 
group, consisting of the fees collected from market makers trading 
options in that group. The PMM for the group is responsible for 
arranging and making all payments to Electronic Access Members for 
order flow sent to the ISE in options in that Group.
    The purpose of the proposed rule change is to establish a ceiling 
of $750,000 in each of the ten payment-for-order-flow funds that the 
ISE maintains. To date, the ISE has been paying out of these funds less 
money than has been collected, thus building a balance in the 
individual funds. The ISE believes that capping each fund at $750,000 
will provide sufficient money for PMMs to maintain the payment-for-
order-flow program while lessening the economic burden on market makers 
to continue to pay payment-for-order-flow fees. The funds for most of 
the ten groups of options either currently are at, or the ISE 
anticipates soon will reach, the $750,000 level. Once a fund reaches 
this level, market makers trading options in that group will pay the 
payment-for-order-flow fee only when the imposition of such fee is 
necessary to replenish the fund to the $750,000 level.
    The ISE will implement the rule change so that market makers 
economically will not pay the payment-for-order-flow fee whenever the 
fund for a particular group reaches $750,000. In this regard, the ISE 
anticipates that soon all the group funds will reach this level. From 
that time forward, market makers will pay this fee only to the extent 
necessary to replenish a fund after the ISE makes its monthly payments 
to order flow providers. To the extent that collections exceed payments 
in a given month, market makers in a group will be responsible for the 
payment-for-order-flow fee only for that portion of the month necessary 
to return the fund to the $750,000 level.
    The ISE will implement this process by working both with individual 
market makers and their clearing firms, who handle the payment of fees 
for their market maker clients. This could result in more than one 
operational process to implement this fee cap. For example, the ISE 
could cease charging the fee on the day that a fund reaches $750,000; 
alternatively, the ISE could continue to impose the fee for the entire 
month and then credit members for excess payments in their monthly 
bill. The ISE may adopt one or more of these processes (or a similar 
process) depending on the particular needs and practices of its market 
makers and clearing firms.
2. Basis
    The ISE states that the basis for the proposed rule change is the 
requirement under Section 6(b)(4) of the Act \3\ that an exchange have 
an equitable allocation of reasonable dues, fees, and other charges 
among its members and other persons using its facilities.
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    \3\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden 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 ISE has not solicited, and does not intend to solicit, comments 
on this proposed rule change. The ISE 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

    The foregoing rule change, which establishes or changes a due, fee, 
or other charge applicable to members of the Exchange, has become 
effective pursuant to section 19(b)(3)(A) of the Act \4\ and Rule 19b-
4(f)(2) thereunder. \5\ At any time within 60 days of the filing of the 
proposed rule change, the Commission may summarily abrogate the rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(2).
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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 the filing will also be 
available for inspection and copying at the principal office of the 
ISE. All submissions should refer to SR-ISE-2001-31 and should be 
submitted by January 2, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30656 Filed 12-11-01; 8:45 am]
BILLING CODE 8010-01-M